EU Taxonomy in Industry: Substantial Contribution & the DNSH Principle.

Regulation (EU) 2020/852 establishes a common classification system to determine which economic activities qualify as "environmentally sustainable." Companies subject to the CSRD (Directive 2022/2464) must report their alignment level, disclosing what percentage of their turnover, capital expenditure (capex) and operating expenditure (opex) comes from taxonomy-aligned activities. For manufacturing companies, this directly affects investment decisions in new production lines, energy efficiency, and decarbonisation processes.

The six objectives are: 1) climate change mitigation, 2) climate change adaptation, 3) sustainable use and protection of water and marine resources, 4) transition to a circular economy, 5) pollution prevention and control, and 6) protection and restoration of biodiversity and ecosystems. An economic activity must make a substantial contribution to at least one of these objectives to be considered taxonomy-aligned.

For an industrial activity to be considered taxonomy-aligned it must meet three simultaneous conditions: make a substantial contribution to at least one of the six environmental objectives (for example, significantly reducing the emissions of a production process), do no significant harm (DNSH) to any of the other five objectives, and comply with minimum safeguards on human and labour rights (OECD, United Nations). The DNSH principle is often the most restrictive in practice: an activity may reduce CO2 emissions but cause significant harm to the circular economy or biodiversity objective, and would then be excluded from the taxonomy.

These are quantitative and qualitative thresholds specific to each economic activity and sector, defining exactly when substantial contribution is met and when significant harm is avoided. For industrial activities, these criteria are typically set as emissions intensity per unit produced (for example, tonnes of CO2 per tonne of steel), the percentage of renewable energy used, or limits on pollutants discharged. They are published through sector-specific delegated acts and periodically reviewed by the Commission to reflect technological progress.

Banks and investment funds subject to the Sustainable Finance Disclosure Regulation (SFDR) must report what percentage of their portfolio is taxonomy-aligned. This creates a real market incentive: aligned industrial projects (for example, a new production line with certified low energy consumption) find it easier to access green financing lines, sustainable bonds, or preferential interest-rate terms linked to ESG criteria.

No. The Regulation does not require a company's activities to be taxonomy-aligned; it requires transparent reporting of what percentage is aligned (which can be 0%). In practice, however, a low alignment percentage can negatively affect access to green financing and the perception of institutional investors increasingly focused on sustainability criteria.

Industrial activities with published technical criteria include: manufacture of low-carbon hydrogen, cement manufacturing with low-emission processes, manufacture of batteries for electric vehicles, steel production via direct-reduction processes using hydrogen, and manufacture of energy-efficiency equipment. The list is periodically expanded through new sector-specific delegated acts.

The two regulations are complementary: the CSRD establishes the general obligation to report on sustainability, while the Taxonomy defines the specific criteria for measuring the environmental alignment of reported activities. Companies subject to the CSRD must include taxonomy indicators (aligned turnover, capex and opex) as part of their sustainability report under ESRS 2. See our page on CSRD for manufacturing companies for the full reporting context.