Key Points
- An activity is taxonomy-aligned only when it passes all four tests. Failing any single one drops the activity back to taxonomy-eligible but not aligned.
- The EY EU Taxonomy Barometer 2025 found average alignment rates of just 10% for turnover and 16% for CapEx across reporting entities.
- Companies report alignment through three KPIs (turnover, CapEx, OpEx, each expressed as a percentage of the corresponding total).
- From the 2025 financial year onward, alignment reporting extends beyond climate to cover water, circular economy, pollution prevention, and biodiversity objectives.
What is Taxonomy-Aligned Activity?
The EY EU Taxonomy Barometer 2025 found that average alignment rates sit at roughly 10% of turnover and 16% of CapEx. That gap between "eligible" and "aligned" catches a lot of teams off guard, because the four-test framework in Article 3 of the EU Taxonomy Regulation is stricter than it looks on paper. Most entities pass the eligibility screen without difficulty, then stall at the technical screening criteria (TSC) or the DNSH assessment.
The EU Taxonomy Regulation creates a two-stage gate. First, a company checks whether an economic activity appears in the delegated acts that list taxonomy-eligible activities. If it does, the company then tests alignment against four cumulative conditions set out in Article 3. The first condition requires a substantial contribution to one of six environmental objectives (Articles 10–15). The delegated acts define what "substantial" means for each activity through quantitative thresholds called TSC. A building renovation, for instance, must achieve a primary energy demand at least 30% below the nearly zero-energy building standard. The second condition is the DNSH test: the activity can't cause significant harm to any of the remaining five objectives. The third and fourth conditions require compliance with minimum safeguards (anchored in the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights) and conformity with the applicable TSC respectively.
Non-financial companies subject to the CSRD report the proportion of aligned activities across turnover and CapEx KPIs (and OpEx where material). The Omnibus Simplification Package (expected to take effect in 2026) introduces a 10% materiality threshold allowing companies to exclude non-material activities from detailed alignment assessment.
Worked example
Client: Italian food production company, FY2025, revenue €67M, IFRS reporter. Rossi operates a cold-storage logistics fleet and a solar installation on its production facility. The entity is within CSRD scope and must report taxonomy KPIs for the first time.
Step 1: Screen for eligibility
Rossi identifies two potentially eligible activities. The solar installation (activity 7.6 in the Climate Delegated Act, "Installation, maintenance and repair of renewable energy technologies") generated €0.4M of internal energy savings capitalised as CapEx. The cold-storage fleet (activity 6.6, "Freight transport services by road") produced €8.2M in turnover from third-party logistics contracts.
Documentation note: record each activity's NACE code mapping against the Climate Delegated Act activity descriptions. File the revenue and CapEx attribution workpapers with source ledger references.
Step 2: Test alignment for the solar installation
The TSC for activity 7.6 require on-site renewable energy generation. Rossi's 420 kWp rooftop array qualifies. The DNSH criteria require that the equipment doesn't contain certain hazardous substances (pollution prevention objective) and that a waste management plan exists for end-of-life panels (circular economy objective). Rossi provides supplier declarations and a decommissioning plan. Minimum safeguards are satisfied through Rossi's human rights due diligence process aligned with the OECD Guidelines. The solar CapEx of €0.4M is taxonomy-aligned.
Documentation note: file the TSC compliance checklist for activity 7.6, the supplier hazardous-substance declarations, the panel decommissioning plan, and the human rights due diligence policy.
Step 3: Test alignment for the cold-storage fleet
The TSC for activity 6.6 require that vehicles have specific CO₂ emission thresholds. Rossi's fleet consists of Euro VI diesel trucks with emissions of 82 g CO₂/tkm, exceeding the delegated act threshold. The fleet is taxonomy-eligible but not taxonomy-aligned.
Documentation note: record the fleet emission data per vehicle category and the applicable TSC threshold. Record the conclusion that alignment isn't met and retain the manufacturer emission certificates.
Step 4: Calculate and report KPIs
Aligned turnover is €0 out of €67M (0%), because the solar installation generates no external revenue. Aligned CapEx is €0.4M out of €9.1M total CapEx (4.4%). Aligned OpEx relates to maintenance of the solar array (€0.02M out of €4.8M total eligible OpEx, approximately 0.4%).
Documentation note: reconcile each KPI numerator to the underlying ledger accounts and ensure the denominator matches the total reported under the CSRD disclosure templates. Cross-reference the fleet exclusion to the TSC failure in Step 3.
Conclusion: Rossi reports a low alignment rate driven by one qualifying CapEx item, which is defensible given the documented TSC pass for the solar installation and the documented TSC failure for the logistics fleet.
Why it matters in practice
The EY EU Taxonomy Barometer 2025 found that 34% of reporting entities still don't explain the gap between eligibility and alignment in their disclosures. Regulation (EU) 2020/852 Article 8 and the Disclosure Delegated Act require qualitative context alongside the KPI percentages. An auditor providing limited assurance on the sustainability statement who accepts bare KPI figures without verifying the underlying TSC assessment hasn't obtained sufficient evidence. The file should tell a story: why this activity passed, why that one didn't, what evidence supports each conclusion, and where the gaps remain.
Teams often treat the DNSH assessment as a tick box exercise, filling in generic checklists rather than testing activity-specific criteria. It's honestly painful to review a workpaper where the same boilerplate DNSH narrative has been pasted across five different activities with different environmental profiles. The DNSH requirements differ by activity and by the environmental objective to which substantial contribution is claimed. A December 2024 AFME review of DNSH practices confirmed that many entities apply a one-size-fits-all approach, which produces incomplete assessments and audit trail gaps.
Taxonomy-aligned vs. taxonomy-eligible
| Dimension | Taxonomy-aligned | Taxonomy-eligible |
|---|---|---|
| Definition | Activity passes all four Article 3 conditions | Activity appears in a delegated act but has not been tested against the four conditions (or has failed one or more) |
| Performance threshold | Must meet quantitative TSC specific to the activity and environmental objective | No performance test required |
| DNSH and safeguards | Both must be satisfied | Neither is assessed at the eligibility stage |
| Reporting treatment | Reported as a percentage of turnover and CapEx (and OpEx where material) in the aligned KPI row | Reported separately in the eligible KPI row; the aligned portion is a subset |
| Audit focus | TSC compliance evidence, DNSH activity-specific checklists, minimum safeguards documentation, qualitative gap explanations | Correct mapping of NACE codes to delegated act activity descriptions |
Investors and regulators read the alignment rate as the measure of genuine sustainability performance. An entity with 40% eligibility but 5% alignment signals that most of its potentially green activities don't yet meet the required thresholds.
Related terms
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Frequently asked questions
What is the difference between taxonomy-eligible and taxonomy-aligned?
A taxonomy-eligible activity appears in the delegated acts as potentially contributing to an environmental objective, regardless of performance. Taxonomy-aligned means the activity has passed all four Article 3 tests: substantial contribution, DNSH, minimum safeguards, and technical screening criteria. Eligibility alone doesn't make an activity sustainable under the regulation.
Do I need assurance on taxonomy KPIs?
Yes, for entities within CSRD scope. The sustainability statement containing taxonomy KPIs is subject to limited assurance from FY2024 onward under Article 34 of the Accounting Directive as amended by the CSRD. The assurance provider evaluates whether the entity's process for identifying eligible activities and testing alignment produces KPIs free from material misstatement.
How does the Omnibus Simplification Package change taxonomy reporting?
The Omnibus proposals narrow mandatory taxonomy disclosure to entities with over 1,000 employees and €450M turnover. They also introduce a 10% materiality threshold for excluding non-material activities from detailed alignment testing. Entities below the new thresholds may still report voluntarily.