Introduction: Compliance and Sustainability
For companies operating in the EU, compliance obligations vary based on CSRD thresholds. The EU-Taxonomy applies to large companies meeting at least two of three CSRD criteria: (1) 250+ employees, (2) €50M+ turnover, or (3) €25M+ total assets. These thresholds, however, are currently under re-evaluation under the so-called “Omnibus Proposal”. This proposal by the European Commission suggests that CSRD should apply for companies with 1000+ employees and €50M+ turnover or €25M+ in total assets and EU-Taxonomy applying for companies with 1000+ employees and €450M in turnover.
Additionally, financial institutions and publicly listed SMEs must comply with CSRD starting in 2026. This might also change with the Omnibus proposal, which suggest a start from 2027 onwards. While EU-Taxonomy reporting is currently not mandatory for all SMEs, they may choose to comply voluntarily or be required by investors and stakeholders.
With increasing demands for transparency from investors, regulators, and the financial sector, businesses must integrate sustainability into their core strategies. Gaining a comprehensive understanding of the EU-Taxonomy framework is crucial for ensuring compliance, mitigating risks, and capitalizing on opportunities in the transition to a green economy.
Understanding EU-Taxonomy: Framework & Objectives
The EU-Taxonomy is a classification system that defines sustainable economic activities based on six key environmental objectives:
- Climate Change Mitigation – Actions that reduce greenhouse gas emissions, including renewable energy, energy efficiency improvements, and sustainable transportation.
- Climate Change Adaptation – Measures that enhance resilience to climate-related risks, such as flood defense systems and water conservation initiatives.
- Sustainable Use and Protection of Water and Marine Resources – Activities aimed at preserving aquatic ecosystems, reducing pollution, and promoting responsible water consumption.
- Transition to a Circular Economy – Strategies that focus on waste reduction, recycling, and sustainable product design to maximize resource efficiency.
- Pollution Prevention & Control – Efforts to limit air, water, and soil pollution through emission controls, sustainable waste management, and cleaner industrial processes.
- Protection and Restoration of Biodiversity and Ecosystems – Measures to conserve biodiversity, rehabilitate degraded ecosystems, and prevent habitat destruction.
For an economic activity to qualify as environmentally sustainable under the EU-Taxonomy, it must significantly contribute to at least one of these objectives without causing significant harm (DNSH) to any of the others. Compliance with technical screening criteria set by the EU is also required. For example, an initiative aimed at climate change mitigation must not adversely impact biodiversity or water quality.
Additionally, businesses must adhere to EU-Taxonomy minimum safeguards, which require compliance with the OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, and ILO Core Conventions. Companies must demonstrate compliance and ensure that no violations occur.
The EU-Taxonomy serves as a regulatory tool to redirect capital flows toward sustainable investments, embed sustainability into risk management frameworks, and foster long-term economic growth aligned with climate goals.
EU-Taxonomy Reporting & Compliance Requirements
Depending on the outcome of the Omnibus Proposal, companies subject report under the CSRD starting in 2025 or 2026, must disclose their alignment with EU-Taxonomy criteria, with reports due in 2026 or 2027. This includes evaluating and reporting the proportion of their turnover, capital expenditure (CapEx), and operating expenditure (OpEx) linked to sustainable economic activities. Companies must differentiate between taxonomy-eligible and taxonomy-aligned activities:
- Turnover – The percentage of revenue generated from activities classified as sustainable.
- CapEx (Capital Expenditure) – Investments in sustainability-driven projects, such as upgrading facilities for energy efficiency or expanding renewable energy initiatives.
- OpEx (Operating Expenditure) – Costs associated with maintaining low-carbon infrastructure, circular economy processes, and sustainable resource management.
Structured Reporting Process:
- Identify economic activities that meet eligibility criteria.
- Assess alignment with EU-Taxonomy standards.
- Conduct materiality analysis to evaluate significant contributions.
- Ensure compliance with DNSH principles and technical screening criteria.
- Verify adherence to minimum social safeguards.
- Define and categorize turnover, CapEx, and OpEx.
- Audit and verify activities before final reporting.
- Report findings within annual sustainability disclosures.
This structured reporting process enhances transparency, helping financial institutions, investors, and regulators assess which companies genuinely contribute to EU sustainability goals. The EU does not provide an official 'Taxonomy rating.' However, companies are required to undergo third-party verification of their taxonomy-aligned activities to ensure auditability. Investors and rating agencies may also develop independent sustainability scores based on disclosed data.
The Challenges of Compliance & Data Management
Achieving EU-Taxonomy compliance presents significant challenges, particularly in data collection, classification, and reporting. Accurately assessing eligibility across diverse business operations requires a thorough understanding of regulatory frameworks, while maintaining data integrity and auditability necessitates structured governance practices.
Organizations often struggle with fragmented ESG data sources across multiple departments, making it difficult to ensure consistent integration. With regulatory landscapes evolving, companies must remain proactive in staying updated on compliance requirements.
Reliance on manual reporting or disconnected systems can lead to inefficiencies and heightened compliance risks. Businesses need to implement structured data frameworks to improve accuracy, integrate sustainability insights into corporate governance, and minimize administrative burdens.
Leveraging Technology to Simplify EU-Taxonomy Compliance
Given the complexity of sustainability reporting, technology-driven solutions play a critical role in streamlining compliance. Digital platforms specializing in sustainability management enable organizations to:
- Automate data collection by integrating with ERP and financial systems.
- Ensure standardized calculations aligned with EU-Taxonomy methodologies.
- Monitor sustainability metrics in real time to enhance decision-making.
- Generate audit-ready reports to meet regulatory requirements efficiently.
A centralized sustainability management platform can help businesses consolidate ESG data, strengthen governance, and seamlessly align operations with sustainability standards. The WAVES®Sustainability Management Platform (SMP) offers automated compliance tools that simplify EU-Taxonomy and CSRD reporting. Implementing such tools not only minimizes compliance risks but also provides strategic insights for long-term sustainability performance.
Conclusion: Future-Proofing Your Business for Sustainability Success
As sustainability regulations tighten, companies that proactively align with the EU-Taxonomy will position themselves as leaders in sustainable finance and corporate responsibility. The move toward compliance is more than just a regulatory obligation—it represents a strategic advantage in enhancing operational resilience, attracting investors, and driving long-term growth in an evolving economic landscape.
By embracing automated, standardized, and data-driven sustainability solutions, businesses can navigate the regulatory landscape effectively while making meaningful contributions to a more sustainable future. Organizations that take proactive steps today will be at the forefront of the sustainable economy of tomorrow.