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10% Exemption: EU Taxonomy Alignment Workflow for Reporting Teams

September 30, 2026
10% Exemption: EU Taxonomy Alignment Workflow for Reporting Teams

EU Taxonomy alignment requires an economic activity to pass four legal tests: substantial contribution to at least one of six environmental objectives, no significant harm to the others, compliance with minimum safeguards, and satisfaction of activity-specific technical screening criteria. Reporting entities disclose the results through turnover, CapEx, OpEx and, for financial institutions, the Green Asset Ratio, using standardized Commission templates.

TL;DR:

  • Activities representing less than 10% of turnover, CapEx, or OpEx can be excluded from full assessment if documented, starting from January 2026.
  • Clear mapping of activities to NACE codes and technical screening criteria is essential to avoid errors and rework in templates.
  • Evidence for DNSH and minimum safeguards must be specific, traceable, and compiled during the process, not after it.
  • Most reporting failures stem from skills gaps in applying technical criteria and evidence gathering, which targeted training can effectively address.
  • Partial disclosures of activities below the 10% threshold are permitted but must be transparently documented to avoid misleading conclusions.
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Table of Contents

What the EU Taxonomy is and the six objectives it protects

The EU Taxonomy is the harmonized classification system that tells investors and companies which economic activities count as environmentally sustainable. It sits at the center of the European Green Deal's finance architecture, giving capital markets a common reference point instead of dozens of competing green labels.

The European Commission's Taxonomy framework defines six environmental objectives that every assessment maps against:

  • Climate change mitigation
  • Climate change adaptation
  • Sustainable use and protection of water and marine resources
  • Transition to a circular economy
  • Pollution prevention and control
  • Protection and restoration of biodiversity and ecosystems

An activity is Taxonomy-eligible when it is simply described in the delegated acts, regardless of how it performs. Alignment is the harder test: it means the activity actually meets all four conditions described later in this guide. Eligibility is a screening step, alignment is the reportable outcome.

Who must report, and how the 2025-2026 simplifications change scope

Taxonomy reporting obligations flow from the Corporate Sustainability Reporting Directive's scope, which has phased in large companies, listed entities and financial undertakings in stages rather than all at once. Non-financial undertakings generally report turnover, CapEx and OpEx KPIs, while banks, asset managers and insurers add the Green Asset Ratio and related indicators specific to their balance sheets.

The most consequential recent change is procedural rather than definitional. A 2025 Delegated Act, clarified through Commission Q&A published in July 2025, introduced a materiality exemption that applies from January 1, 2026:

  • Activities representing less than 10% of turnover, CapEx or OpEx can be excluded from full eligibility and alignment assessment if the exclusion is documented.
  • Certain financial undertakings gained options to limit the scope of their reporting under the same package.
  • The changes apply retrospectively from the January 2026 date, with an optional deferral window for entities not yet ready.

For most mid-sized reporting entities, this means fewer marginal activities to chase down and more time spent proving alignment on the activities that actually matter.

Every eligible activity has to clear four separate hurdles before it can be reported as aligned, and the Taxonomy Regulation's Article 3 framework treats them as cumulative, not alternative.

Substantial contribution means the activity measurably advances at least one of the six objectives, typically demonstrated through a quantitative threshold. A building renovation that cuts primary energy demand by a defined percentage, or a manufacturing process that meets a sector-specific emissions intensity limit, both illustrate the kind of concrete, measurable performance the test expects.

Do No Significant Harm, known as DNSH, requires checking the same activity against the other five objectives to confirm it does not undermine them while helping one. A solar installation might contribute to climate mitigation but still need a DNSH check on water use during construction or on biodiversity impacts at the site.

Minimum safeguards shift the lens from environmental performance to governance. The entity must show it operates in line with baseline expectations on human rights, labor standards, anti-corruption and fair taxation, generally evidenced through existing due diligence policies rather than activity-specific tests.

Technical screening criteria, or TSC, are the detailed, activity-level thresholds published in the delegated acts. They specify exactly what "substantial contribution" and "DNSH" mean for a given activity, down to numeric limits, so two companies in the same sector are held to the same bar. Passing TSC is usually the most evidence-intensive part of the assessment, since it demands activity-specific data rather than company-wide policy statements.

The four legal tests that define alignment — overview diagram

Reporting the numbers: KPIs and the two core templates

Once an activity clears the four tests, the results get expressed through a small set of financial KPIs. Turnover measures the share of net revenue generated by Taxonomy-aligned activities. CapEx captures aligned or eligible capital expenditure, often the easiest KPI to move quickly since new investment can be redirected toward compliant activities. OpEx covers a narrower set of operating costs, mainly maintenance, research and short-term leases tied to eligible activities, and tends to carry less weight for service-based businesses. Green Asset Ratio, or GAR, applies specifically to banks and measures the proportion of Taxonomy-aligned assets on their balance sheet.

These KPIs get disclosed through two templates set out in the Disclosures Delegated Act annexes:

  1. Template 1 summarizes eligible and aligned proportions of turnover, CapEx and OpEx at the entity level.
  2. Template 2 breaks those figures down activity by activity, with columns for each environmental objective and rows tagged to specific NACE codes.

Populating both accurately depends on getting the mapping right at the activity level, and three issues cause most of the rework. NACE code misalignment between financial systems and Taxonomy activity descriptions creates mismatches that ripple through both templates. Objective breakdowns get skipped entirely when teams treat Template 2 as a single aggregate figure rather than a per-objective disclosure.

Pro Tip: Reconcile your NACE code mapping against your general ledger before you touch either template. Most Template 2 errors trace back to a mismatch made months earlier during activity classification.

A repeatable workflow from raw data to completed templates

Turning financial statements and activity lists into a defensible disclosure works best as a sequence rather than a single push at year end.

  1. Run materiality screening first, applying the 10% exemption thresholds to turnover, CapEx and OpEx, and document every excluded activity with the reasoning behind it.
  2. Map remaining activities against the Taxonomy's eligible activity descriptions, then run technical screening criteria checks only on activities that pass the eligibility filter.
  3. Assemble documentary evidence for each activity that passes TSC, tagging every document to the specific template row and objective it supports.
  4. Escalate to technical specialists or third-party verifiers when TSC thresholds involve engineering data, emissions modeling or biodiversity assessments outside the finance team's expertise.

Staging the work this way keeps the team from spending assurance-grade effort on activities that will end up excluded on materiality grounds anyway.

DNSH and minimum safeguards: what reviewers actually check

DNSH and minimum safeguards are where reporting most often breaks down, because the evidence required looks nothing like a financial KPI. Reviewers and assurance providers expect specific, traceable documentation rather than narrative assurances.

  • Emissions data tied to the specific facility or activity, not company-wide averages
  • Waste management records showing controls relevant to the DNSH check on circular economy or pollution objectives
  • Biodiversity screening or site assessments where the activity touches sensitive land
  • Human rights due diligence policies and evidence of implementation, not just publication
  • Anti-corruption policies and tax compliance statements covering the reporting entity and relevant subsidiaries

Assurance providers working under frameworks like ISAE 3000 typically test whether the documented evidence actually supports the DNSH conclusion drawn, rather than simply confirming a policy exists.

Pro Tip: Build your DNSH evidence file at the same time as your TSC evidence, not after. Reviewers frequently reject alignment claims not because the activity fails the environmental test but because the safeguards file was assembled after the fact.

Where alignment claims break down under scrutiny

Most audit findings and investor pushback trace back to a small set of recurring errors rather than genuine disagreement about whether an activity qualifies.

  • Reporting an activity as aligned before DNSH or minimum safeguards evidence exists, rather than staging eligibility first and alignment second
  • Misallocating CapEx or OpEx between activities, or double counting a single investment's contribution across more than one objective
  • Relying on supplier self-declarations for supply chain data without independent verification, particularly for DNSH checks that depend on upstream information
  • Treating OpEx as a major reporting lever for service businesses when it typically covers a narrow set of costs and often benefits more from the materiality exemption than from detailed tracking

The Platform on Sustainable Finance's response to the delegated act specifically flagged OpEx simplification and partial alignment reporting as areas where usability improvements were overdue, which explains why so many teams still find OpEx confusing under the older approach.

A phased timeline for building a defensible disclosure

Teams that treat Taxonomy reporting as a single year end exercise tend to produce weaker disclosures than teams that phase the work.

  1. In the first three months, assign clear ownership of the disclosure, run the materiality screening, and complete a first-pass activity mapping.
  2. Between months three and six, pilot Template 1 and Template 2 with the mapped activities, collect DNSH and safeguards evidence, and run an internal quality check against the technical screening criteria.
  3. From month six through twelve, prepare for external assurance, brief management on the results, and draft investor-facing language that explains any activities left unassessed or partially assessed.

Partial alignment should be reported transparently rather than omitted. An activity that is eligible but not yet demonstrably aligned belongs in the disclosure with a clear note on its status, since the Commission's own guidance on interpretation warns against letting the absence of aligned activities imply weak environmental performance without proper context.

Pro Tip: Document non-assessed items with the same rigor as assessed ones. A clearly labeled "not yet assessed" line is far more defensible than a silent gap an auditor discovers later.

A phased timeline for building a defensible disclosure — overview diagram

How targeted training closes the skills gap behind most reporting failures

Most Taxonomy reporting failures are not disagreements about the rules. They are gaps in the skills needed to apply technical screening criteria correctly, build a DNSH evidence file, or prepare for third-party assurance. Structured training addresses each of these directly rather than leaving teams to interpret delegated acts unaided.

Professional sustainability reporting programs cover template population and KPI calculation, while assurance-focused credentials build the evidence-mapping and testing skills that reviewers expect. Carbon accounting training supports the substantial contribution calculations that underpin climate-related activities. Organizations preparing for their first full alignment cycle often use structured training to bring reporting, finance and assurance staff to a common standard before assurance providers get involved, reducing the back-and-forth that comes from inconsistent internal interpretation.

Balancing compliance burden against transparency value

The 2025-2026 simplifications rightly ease the burden of chasing immaterial activities, but they should never lower the evidence bar for activities actually claimed as aligned. Transparent, partial disclosure serves investors better than a polished figure built on thin documentation.

— Ransford

Where to build the skills your reporting team is missing

Closing these gaps does not require hiring a new team. ESG Training Institute's certification programs and CPD library map directly to the tasks covered here, from template population to DNSH evidence and assurance preparation.

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  • The Certified Sustainability Reporting Professional (CSRP) and Certificate in Sustainability Reporting cover KPI calculation and template mapping.
  • The Certificate in Climate, Sustainability and ESG Assurance builds the evidence and testing skills reviewers expect.
  • The All-Access CPD Pass gives teams ongoing access to carbon accounting, assurance and governance modules; current prices are on the pricing page.

Explore the full catalog and enroll your team at ESG Training Institute.

Sources

FAQ

What are the proposed changes to the EU Taxonomy in 2026?

The main change is a materiality exemption that lets entities exclude activities below 10% of turnover, CapEx or OpEx from full assessment, applicable from January 1, 2026. Certain financial undertakings also gained options to limit reporting scope under the same delegated act.

What are the EU Taxonomy criteria?

An activity must meet four conditions: substantial contribution to one of six environmental objectives, no significant harm to the others, compliance with minimum safeguards, and satisfaction of the technical screening criteria set for that specific activity. All four must be satisfied together for the activity to count as aligned rather than merely eligible.

What is the EU Taxonomy Regulation?

Regulation (EU) 2020/852 established the EU Taxonomy as the classification system for environmentally sustainable economic activities. It underpins Taxonomy reporting obligations and links directly to other EU disclosure frameworks such as SFDR and CSRD.

What is the difference between Taxonomy eligibility and alignment?

Eligibility means an activity is described in the delegated acts, regardless of its actual performance. Alignment means the activity has passed all four legal tests, including technical screening criteria, and can be reported as genuinely sustainable under Template 1 and Template 2.

Does a company without aligned activities have weak sustainability performance?

Not necessarily. Commission guidance on the Taxonomy framework notes that a lack of aligned activities can reflect scope or threshold issues rather than poor environmental performance, and recommends entities provide context alongside their figures.