EU Taxonomy for Manufacturing

What is EU Taxonomy?

The EU Taxonomy is a classification system established by the European Union through Regulation (EU) 2020/852 that defines which economic activities can be considered environmentally sustainable. It provides a common language for investors, companies, and policymakers to identify green investments and avoid greenwashing. By setting science-based criteria for sustainability, the EU Taxonomy serves as the backbone of the European Green Deal and the EU's broader ambition to achieve climate neutrality by 2050.

EU Taxonomy and the Manufacturing Industry

The manufacturing sector is one of the most directly impacted by the EU Taxonomy, accounting for approximately 20% of the EU's total greenhouse gas emissions. Companies operating in this space — from automotive assembly plants and steel producers to chemical manufacturers and electronics makers — must now assess whether their activities meet the Taxonomy's technical screening criteria to qualify as sustainable under EU law.

For example, a steel manufacturer investing in electric arc furnaces powered by renewable energy may qualify for Taxonomy alignment under the low-carbon steel production criteria. Similarly, a plastics company transitioning to bio-based materials or closed-loop recycling processes can potentially classify those investments as environmentally sustainable activities. An automotive parts supplier that produces components exclusively for electric vehicles may also find significant portions of its revenue eligible for Taxonomy alignment.

Beyond the direct environmental criteria, the manufacturing sector must also grapple with disclosure obligations. Large companies subject to the Corporate Sustainability Reporting Directive (CSRD) are required to report what percentage of their turnover, capital expenditure (CapEx), and operating expenditure (OpEx) is aligned with the Taxonomy. This creates pressure across the entire supply chain, as major manufacturers increasingly demand Taxonomy-related data from their suppliers to support their own reporting obligations.

Key Requirements

• Substantial Contribution to at Least One Environmental Objective: Manufacturing activities must demonstrably contribute to one of the six EU environmental objectives — climate change mitigation, climate change adaptation, sustainable use of water resources, transition to a circular economy, pollution prevention and control, or protection of biodiversity and ecosystems.
• Do No Significant Harm (DNSH) to Other Objectives: An activity that helps mitigate climate change must not simultaneously cause significant harm to biodiversity, water quality, or other environmental objectives. For instance, a manufacturer installing solar panels on factory rooftops must ensure the panels' supply chain does not involve hazardous waste disposal practices that violate pollution criteria.
• Compliance with Minimum Social Safeguards: Companies must respect OECD Guidelines on Multinational Enterprises, UN Guiding Principles on Business and Human Rights, and core ILO labour standards. This means ensuring that both direct operations and key supply chain partners uphold workers' rights, health and safety standards, and fair wages.
• Meeting Technical Screening Criteria (TSC): Each manufacturing activity is evaluated against specific, quantitative thresholds. For example, the cement industry faces a threshold of no more than 0.722 tonnes of CO2 per tonne of cement produced to qualify as contributing to climate change mitigation under current criteria.
• Turnover, CapEx, and OpEx Reporting: Companies must calculate and disclose what share of their total revenue comes from Taxonomy-aligned activities, as well as what proportion of capital investments and operating costs support the transition to sustainability.
• Data Collection Across the Value Chain: Manufacturers are required to gather verified emissions data, energy consumption records, and waste management documentation not only from their own operations but increasingly from tier-1 and tier-2 suppliers.
• Third-Party Verification: For listed companies and large undertakings subject to CSRD, Taxonomy disclosures must be verified by an accredited assurance provider, adding a layer of external accountability to internal assessments.

Implementation Steps for Manufacturing Companies

1. Conduct an Activity Mapping Exercise: Begin by identifying all revenue-generating activities within your manufacturing operations and map them against the EU Taxonomy's list of eligible economic activities as defined in the delegated acts. Activities not listed are considered non-eligible and do not qualify for alignment regardless of their environmental performance. Use the NACE classification codes as a starting point to determine which of your production processes fall within the Taxonomy's scope.
2. Assess Alignment Against Technical Screening Criteria: For each eligible activity, gather the quantitative data needed to evaluate whether it meets the specific technical thresholds. This typically involves reviewing energy audits, emissions inventories (Scope 1 and Scope 2), water discharge records, and waste treatment logs. Engage your environmental, health, and safety teams alongside finance to compile a comprehensive data set.
3. Apply the Do No Significant Harm Assessment: For every activity that passes the substantial contribution test, conduct a DNSH evaluation across all five remaining environmental objectives. This often requires legal and environmental expertise to interpret the criteria correctly. Document findings clearly, as these records will be required during external assurance and regulatory review.
4. Verify Minimum Social Safeguards Compliance: Conduct an internal audit of your labour practices, supply chain due diligence processes, and human rights policies. Where gaps are identified — for example, insufficient supplier audits or unclear grievance mechanisms — develop and implement remediation plans before finalising your Taxonomy disclosure.
5. Calculate KPIs for Disclosure: Using your alignment assessments, calculate the three core Taxonomy KPIs: the proportion of aligned turnover, CapEx, and OpEx. Establish a consistent methodology that can be repeated year on year, and document all assumptions and data sources to support auditability.
6. Integrate Taxonomy Reporting into Existing Sustainability Reporting Processes: Align your Taxonomy disclosure with your CSRD non-financial statement or annual report. Many manufacturers find it efficient to integrate Taxonomy data collection into existing ERP systems or sustainability management platforms to reduce manual effort and improve data quality over time.
7. Engage External Assurance Providers Early: Do not wait until the final stages of report preparation to involve your auditor or assurance provider. Early engagement allows you to clarify interpretive questions, address data gaps, and avoid last-minute revisions that can delay publication and increase costs.
8. Build a Forward-Looking CapEx Plan: The EU Taxonomy rewards ambition. Develop a multi-year capital expenditure roadmap that outlines planned investments in energy efficiency, renewable energy, circular economy infrastructure, and low-carbon production technologies. This CapEx plan strengthens your Taxonomy KPIs and demonstrates a credible transition strategy to investors and lenders.

Frequently Asked Questions

Which manufacturing companies are legally required to report under the EU Taxonomy?

Currently, the EU Taxonomy disclosure obligation applies to companies subject to the Non-Financial Reporting Directive (NFRD) and, from 2025 onwards, to companies covered by the Corporate Sustainability Reporting Directive (CSRD). This includes large publicly listed companies, large non-listed companies meeting two of three thresholds — more than 250 employees, more than 40 million euros in turnover, or more than 20 million euros in total assets — as well as listed SMEs from 2026. Smaller manufacturers below these thresholds are not legally required to report but may face indirect pressure from customers, banks, and investors who are themselves subject to Taxonomy obligations.

What happens if a manufacturing activity is eligible but not yet aligned with the Taxonomy criteria?

Eligibility and alignment are two distinct categories in Taxonomy reporting. An activity is eligible if it appears on the list of economic activities covered by the Taxonomy. It is aligned only if it also meets the technical screening criteria, the DNSH requirements, and the minimum social safeguards. Companies must disclose both eligible and aligned KPIs separately, which allows them to communicate their transition progress even when full alignment has not yet been achieved. Many manufacturers use the eligible-but-not-yet-aligned category as a roadmap for future investment priorities.

How does the EU Taxonomy interact with existing environmental certifications such as ISO 14001 or EMAS?

ISO 14001 and EMAS certifications demonstrate that a company has an environmental management system in place, but they do not in themselves confer EU Taxonomy alignment. The Taxonomy requires specific quantitative outcomes — emissions thresholds, waste recovery rates, water discharge limits — rather than process-based management systems. However, companies with mature ISO 14001 or EMAS programmes typically have better data infrastructure and internal processes that make Taxonomy assessment significantly easier to execute. These certifications can also serve as supporting evidence during the minimum social safeguards assessment.

Can a manufacturing company improve its Taxonomy alignment ratio over time?

Yes, and this is precisely what the regulation is designed to encourage. A manufacturer that today reports low alignment can systematically increase that ratio by directing future CapEx toward Taxonomy-aligned investments — for example, replacing fossil-fuel-powered machinery with electrified alternatives, installing on-site renewable energy generation, or redesigning product lines to incorporate recycled materials. The CapEx KPI in particular is forward-looking by design, allowing companies to signal their transition intentions to investors even before those investments have translated into aligned revenue streams.

Summary

The EU Taxonomy represents both a compliance obligation and a strategic opportunity for manufacturers willing to align their operations with Europe's long-term sustainability agenda. Companies that invest early in understanding the criteria, building robust data collection systems, and directing capital toward aligned activities will be better positioned to access green financing, satisfy institutional investors, and meet the growing expectations of customers across the supply chain. The time to act is now — manufacturers that treat EU Taxonomy alignment as a core business priority rather than a reporting burden will gain a measurable competitive advantage in the years ahead.