Key points
- Alignment requires passing all four tests simultaneously: substantial contribution, DNSH, minimum safeguards, and TSC compliance. Failing any single test blocks the activity from the aligned line.
- The Omnibus simplification delegated act (entered into force 28 January 2026) introduced a 10% materiality threshold, letting non-financial companies skip the alignment assessment for activities below 10% of any single KPI.
- Taxonomy KPIs (turnover, CapEx, OpEx, and for credit institutions the green asset ratio) sit inside the CSRD sustainability statement and fall under the limited assurance scope.
- The real bottleneck is data, not regulation. Most entities cannot disaggregate CapEx and OpEx to the individual-activity level the taxonomy demands, and that gap is where greenwashing risk concentrates.
The data problem behind the classification exercise
Picture the scene: a sustainability reporting team sits down with the Climate Delegated Act open on one screen and the client's chart of accounts on the other. The delegated act describes activities like "Installation, maintenance and repair of energy efficiency equipment" (Activity 7.3). The chart of accounts shows cost centres labelled "Building maintenance" and "Facilities." Nobody can tell how much of the EUR 4.2M in facilities spend falls under Activity 7.3 versus ordinary repairs that are not taxonomy-eligible. That is where every taxonomy engagement actually starts, and it is rarely the clean classification exercise the regulation implies.
The EU Taxonomy (Regulation 2020/852) is a classification system that defines which economic activities qualify as environmentally sustainable. Article 3 sets out a four-part test: the activity must make a substantial contribution to at least one of six environmental objectives in Article 9, do no significant harm to the remaining objectives, comply with minimum safeguards on human rights and labour standards, and meet the technical screening criteria (TSC) in the Commission's delegated acts. On paper, the logic is sequential. In practice, the hardest part comes before any of that: mapping the entity's financial records to the delegated act's activity descriptions with enough granularity to populate the KPI templates.
I think this is the most underappreciated tension in taxonomy reporting. The regulation classifies at the level of individual economic activities. Financial systems record at the level of cost centres or legal entities. Bridging those two levels requires allocation keys that are not prescribed anywhere in the regulation. Every entity invents its own, and the assurance provider has to evaluate whether those allocation keys are reasonable without a benchmark to compare against. We are all still figuring this out.
How the four-part test works
Once an entity has identified which of its activities appear in the delegated acts (taxonomy-eligible), each eligible activity runs through the Article 3 test. The Climate Delegated Act (Regulation 2021/2139) and the Environmental Delegated Act (Regulation 2023/2486) set the TSC for activities contributing to each of the six objectives: climate change mitigation, climate change adaptation, sustainable use of water and marine resources, transition to a circular economy, pollution prevention and control, and protection of biodiversity and ecosystems.
An activity that passes the substantial contribution test for one objective must then pass the DNSH assessment against the remaining five. It must also satisfy minimum safeguards (alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights). Only when all four conditions are met simultaneously does the activity count as taxonomy-aligned. An activity that is eligible but fails any condition sits on the eligible-but-not-aligned line of the KPI template.
Companies in scope of the CSRD report taxonomy KPIs showing the proportion of turnover, CapEx, and OpEx associated with aligned activities. Credit institutions report the green asset ratio instead. Article 8 of the Taxonomy Regulation and the Disclosures Delegated Act (Regulation 2021/2178) prescribe the templates. The Omnibus simplification delegated act (published in the Official Journal on 8 January 2026) introduced a 10% materiality threshold: non-financial companies may exclude activities contributing less than 10% of any individual KPI from the alignment assessment. The same act shortened reporting templates and made the OpEx KPI optional when operating expenditure is not material to the business model.
For auditors providing sustainability assurance, the taxonomy disclosures sit within the ESRS sustainability statement and fall under the limited assurance engagement scope.
What actually happens on engagements
Teams stop at eligibility. They identify which delegated act codes match the client's operations and calculate the eligible percentages. Then they move on. The substantial contribution test and the DNSH assessment never get done properly because nobody has time, the data is not there, or both. The Disclosures Delegated Act (Regulation 2021/2178, Article 8) requires separate disclosure of eligible and aligned proportions. When a client reports a 40% eligible figure without breaking out how much of that is actually aligned, the sustainability statement overstates the entity's green credentials. That is a greenwashing risk, and it sits in the assurance provider's lap.
The DNSH test is the worst offender. In my experience, maybe one in five engagement teams I have seen treats DNSH as anything more than a tick box exercise. Each DNSH criterion maps to specific TSC paragraphs in the delegated acts, and the entity must document compliance against each criterion for each aligned activity. A general DNSH statement that says "we comply with all applicable environmental regulations" does not meet the requirement. The assurance provider who accepts that statement without tracing it to the specific TSC paragraphs for each activity leaves a gap that an inspection team will find.
Here is what bothers me about the current state of practice: the regulation is clear enough about what needs to happen, but nobody has enough engagement experience to know what "good" looks like for the evidence trail. Financial statement audits have decades of precedent for what a well-documented valuation file contains. Taxonomy disclosures are on their second reporting cycle. The file should tell a story of how the entity moved from its financial records to the KPI template, but the plot conventions have not been written yet.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production company, FY 2025, revenue EUR 67M, IFRS reporter. Rossi is a Wave 1 CSRD entity and must include taxonomy disclosures in its sustainability statement.
Step 1: identify taxonomy-eligible activities
Rossi reviews the Climate Delegated Act activity descriptions against its operations. The company operates a cold-chain logistics fleet and a cogeneration plant at its Emilia-Romagna production site. Both activities appear in the delegated act. Food processing itself is not listed as taxonomy-eligible.
Step 2: test substantial contribution
The cogeneration plant runs on biomass from certified agricultural residues and generates 12 GWh per year. The Climate Delegated Act (Activity 4.20) sets a threshold of lifecycle emissions below 100g CO2e/kWh. Rossi's engineering team calculates lifecycle emissions at 74g CO2e/kWh based on supplier certificates and combustion data. The cold-chain fleet exceeds the transport emission thresholds, so it is taxonomy-eligible but not aligned.
Step 3: apply DNSH and minimum safeguards
For the cogeneration plant, Rossi assesses DNSH against the five remaining environmental objectives. The pollution prevention DNSH criterion requires compliance with EU emission limits. Rossi holds a valid integrated environmental permit. The minimum safeguards assessment confirms alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
The complication
Rossi's integrated environmental permit expires in September 2025 and the renewal application is pending with the regional authority. Strictly speaking, the DNSH criterion requires compliance, and the permit is valid through the reporting date. But the assurance provider has to consider whether a pending renewal creates uncertainty about continued compliance. If the permit lapses in January 2026 before the sustainability statement is published, the entity's DNSH claim becomes stale. This is the kind of subsequent-event logic that financial statement auditors apply instinctively but sustainability teams often miss. The file needs a note explaining why the team concluded DNSH was met despite the pending renewal, with a cut-off date for monitoring.
Step 4: calculate the KPIs
The cogeneration plant contributes EUR 1.8M in turnover (energy sold to the grid) and EUR 2.4M in CapEx (boiler upgrade completed in FY 2025). It also generates EUR 0.6M in taxonomy-relevant OpEx (maintenance). Rossi's total turnover is EUR 67M, total CapEx EUR 9.1M, total OpEx EUR 48M. Taxonomy-aligned proportions: turnover 2.7%, CapEx 26.4%, OpEx 1.3%. The cold-chain fleet adds to the eligible-but-not-aligned line.
Rossi reports one aligned activity (cogeneration) and one eligible-but-not-aligned activity (cold-chain fleet), with KPIs traceable to underlying operational and financial data and a documented DNSH assessment per activity including the permit renewal judgement.
Taxonomy versus CSRD reporting
| Dimension | EU Taxonomy (Regulation 2020/852) | CSRD sustainability statement (Directive 2022/2464) |
|---|---|---|
| What it classifies | Whether specific economic activities are environmentally sustainable | Whether sustainability topics are material to the entity from impact and financial perspectives |
| Assessment unit | Individual economic activity | Entity-level sustainability matters |
| Governing criteria | TSC in delegated acts, plus DNSH and minimum safeguards | Double materiality assessment under ESRS 1.37-58 |
| Output | KPIs: turnover, CapEx, OpEx aligned percentages | Full sustainability statement covering ESRS cross-cutting and topical standards |
| Relationship | Taxonomy KPIs are a subset of the broader sustainability statement | The CSRD provides the reporting vehicle; taxonomy disclosures are embedded within it |
The taxonomy and the CSRD serve different functions but overlap in practice. The taxonomy classifies activities. The CSRD reports on the entity. An entity can have a high taxonomy-aligned CapEx ratio while disclosing material climate transition risks under ESRS E1 that affect the same activities. Some practitioners argue the two should eventually merge into a single reporting flow, and I can see the logic, but the legal bases are different (regulation versus directive) and the assessment units do not align. For now, the file needs to treat them as separate analyses that cross-reference each other.
Where reasonable people disagree
There is genuine disagreement about whether the 10% Omnibus materiality threshold helps or hurts. Supporters say it removes busywork: if an activity contributes 3% of turnover and 1% of CapEx, the cost of a full alignment assessment outweighs the informational value. Critics argue that small activities can still carry disproportionate environmental risk and that the threshold encourages entities to structure their disclosures to keep borderline activities just below the line. Both positions are defensible. I lean toward the view that the threshold is pragmatically necessary but that assurance providers should document why excluded activities genuinely are immaterial, not just that they fall below 10%. A number is not a reason.
Related terms
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Frequently asked questions
How do I document the EU Taxonomy assessment in the audit file?
Record the eligibility screening (mapping each activity to the delegated act codes), the substantial contribution calculations with source data, the DNSH assessment per environmental objective, and the minimum safeguards evaluation. Article 8 of Regulation 2020/852 and the Disclosures Delegated Act prescribe the KPI templates. The assurance provider traces each KPI to financial records and operational data.
Does the 10% Omnibus materiality threshold mean small activities can be ignored?
Not ignored, but excluded from the detailed alignment assessment. The delegated act published 8 January 2026 allows non-financial companies to skip the alignment assessment for activities contributing less than 10% of any single KPI. The entity must still disclose the proportion excluded as non-material within the reporting template.
What happens if an activity passes the substantial contribution test but fails DNSH?
The activity is taxonomy-eligible but not taxonomy-aligned. The entity reports it in the eligible-but-not-aligned line of the KPI template. Regulation 2020/852 Article 3 requires all four conditions (substantial contribution, DNSH, minimum safeguards, TSC compliance) to be met simultaneously. Failing any one condition blocks alignment classification.