EU Taxonomy alignment will be a big topic for mid-market companies this year. As the Corporate Sustainability Reporting Directive (CSRD) expands its scope, some SMEs will be required to meet EU Taxonomy standards when reporting their sustainable activities.

This shift in focus from the Non-Financial Reporting Directive (NFRD) means mid-market companies may need to assess their activities against a range of objectives, report on specific key performance indicators (KPIs), and distinguish between being eligible or aligned in the eyes of the EU Taxonomy. In this article, we’ll outline the considerations mid-market companies will have to make as new reporting requirements come into effect in 2026.

Quick recap: What is the EU Taxonomy, exactly?

The EU Taxonomy is a classification system identifying which business activities are environmentally friendly, helping investors and companies support the EU’s climate goals. Crucially, it standardizes sustainability reporting across businesses. The EU Taxonomy Regulation (Regulation (EU) 2020/852) legally enforces how companies must assess and disclose their alignment with the EU Taxonomy.

Companies must measure economic activities against six EU Taxonomy objectives while not causing significant harm to any of the other sustainability goals. To achieve EU Taxonomy alignment, businesses must meet four key conditions while disclosing three key performance indicators (KPIs) related to turnover, capital expenditure (CapEx), and operational expenditure (OpEx). 

The Corporate Sustainability Reporting Directive (CSRD) combines financial and non-financial data in a single framework, focusing on reporting, with the EU Taxonomy outlining which activities are sustainable. Notably, the CSRD expands the Non-Financial Reporting Directive (NFRD) scope to mid-market companies (that meet specific criteria) from 2024 onwards, meaning more detailed sustainability disclosures for a broader range of entities and industries. 

What happens if you don't comply with the EU Taxonomy?

For mid-market companies falling under the CSRD, non-compliance could mean several things, including:

Regulatory penalties

Stricter enforcement under the CSRD could lead to financial sanctions for incomplete or inaccurate sustainability disclosures.

Limited access to green financing
Investors and financial institutions increasingly assess EU Taxonomy alignment when approving sustainability-linked loans and investments.

Reputational risk
Poor transparency or failure to report can damage stakeholder trust, raising concerns about greenwashing.

Operational inefficiencies
Incomplete sustainability data can result in last-minute reporting corrections, manual work, and higher audit risks.

By aligning with the EU Taxonomy, mid-market companies can avoid these risks, meet the growing expectations of financial partners, and keep their sustainability efforts credible and transparent.

To which entities does the EU Taxonomy Regulation apply?

The EU Taxonomy regulation applies to companies required to disclose their sustainability performance under the EU’s evolving reporting framework. Its scope has expanded with the transition from the NFRD to the CSRD, which includes a broader range of companies, including some mid-market companies.

Here’s who must comply:

Large public-interest companies already subject to the NFRD

Since 2018, large public-interest companies with more than 500 employees have been required to disclose sustainability performance under the NFRD. These companies must report on their EU Taxonomy alignment, including disclosure of turnover, CapEx, and OpEx related to sustainable activities.

Large Companies (CSRD Scope)

From January 1, 2024, the CSRD expanded mandatory sustainability reporting to all large companies meeting two out of three criteria:

• 250+ employees
• €50+ million in net turnover
• €25+ million in assets

These companies must report on both EU Taxonomy eligibility and alignment, ensuring activities meet the regulation’s four conditions, which we’ll cover later in this article.

Listed small and medium-sized enterprises (SMEs)

From 2026, listed SMEs must report under the CSRD with slightly simplified requirements compared to larger entities. Their first reports will be due in 2027, though they can opt out until 2028 when providing a reason for deferring. 

Why does this matter?
Mid-market companies often have limited resources when it comes to compliance and sustainability compared to larger organizations. This can mean an overreliance on manual data collection, which invariably results in human errors. And with the increased likelihood of mistakes comes the potential for non-compliance fines brought about by incorrect reporting, often snowballing into reputational damage.

Large non-EU companies

From 2028, non-EU companies with significant operations in the EU must comply if they:

• Generate €150+ million turnover within the EU
• Meet the large company criteria stated above

The EU Taxonomy objectives

The EU Taxonomy sets out six environmental objectives that define sustainable economic activity. These objectives help businesses assess whether their operations contribute meaningfully to the EU’s climate and sustainability goals, including the European Green Deal and European Climate Law. There are also four conditions and three KPIs directly related to these objectives.

The EU Taxonomy’s 6 objectives

The EU Taxonomy Regulation defines two categories of sustainable economic activities: substantial contribution activities that directly support one of the six environmental objectives and enabling activities that help other activities meet sustainability goals. Transitional activities also fall under substantial contribution when no fully sustainable alternatives exist.

Climate change mitigation
Activities that reduce or prevent greenhouse gas emissions (e.g., renewable energy production).

Climate change adaptation
Activities that increase resilience against climate-related risks (e.g., flood barriers and climate-resilient infrastructure).

Sustainable use and protection of water and marine resources
Reducing water consumption and protecting ecosystems (e.g., water recycling technologies).

Transition to a circular economy
Minimizing waste and resource consumption through recycling and product lifecycle extensions (e.g., reusable materials and repair services).

Pollution prevention and control
Preventing or minimizing pollutants in air, water, and soil (e.g., low-emission technologies and pollution control systems).

Protection and restoration of biodiversity and ecosystems
Conserving and restoring natural habitats and biodiversity (e.g., reforestation initiatives).

The 4 conditions for EU Taxonomy alignment

For an activity to be classified as EU Taxonomy-aligned, it must meet the four conditions below, which help create a strict and standardized approach to determining industry sustainability.

Substantial contribution
The activity must significantly contribute to at least one of the six objectives outlined above.

Do no significant harm (DNSH)
The activity must not cause harm to any of the other environmental objectives. This makes sure, for example, that a project aimed at climate change mitigation doesn’t lead to loss of biodiversity.

Compliance with minimum social safeguards
Companies must respect fundamental human rights and international labor standards, including the UN Guiding Principles on Business and Human Rights.

Meeting the technical screening criteria
Activities must pass the detailed technical screening criteria established for each objective, ensuring compliance with sustainability metrics.

The 3 EU Taxonomy reporting KPIs

Companies required to report under the EU Taxonomy must also disclose three key performance indicators to demonstrate the extent of their alignment with the regulation:

Turnover
The percentage of a company’s total revenue derived from Taxonomy-aligned activities.

Capital expenditure (CapEx)
The share of investments directed toward Taxonomy-aligned projects or assets (e.g., renewable infrastructure upgrades).

Operational expenditure (OpEx)
The proportion of ongoing operational costs supporting sustainable activities (e.g., maintenance for green-certified equipment).

These KPIs provide measurable data for investors and stakeholders to assess a company’s sustainability performance.

EU Taxonomy Eligibility vs. Alignment: What’s the Difference?

Understanding the differences between eligibility and alignment is essential for mid-market companies aiming for accurate sustainability reporting under the EU Taxonomy.

EU Taxonomy Eligibility

An economic activity is considered eligible if it is one of the EU Taxonomy’s six environmental objectives but has not yet been fully assessed against the four conditions of alignment:

• Substantial contribution
• Do no significant harm (DNSH)
• Compliance with minimum social safeguards
• Meeting the technical screening criteria
  

For instance, a company installing solar panels at its facilities would be eligible for EU Taxonomy consideration because renewable energy production is listed in the regulation. However, it hasn’t yet been assessed against all criteria for alignment.

EU Taxonomy Alignment

An activity is classified as aligned only if it meets all four conditions above. If the same solar panel installation in the example above has been verified to meet energy efficiency benchmarks, avoid harming other objectives during installation, and comply with technical screening standards, it would be considered aligned.

Here’s how you assess EU Taxonomy Alignment as a mid-market company

Achieving EU Taxonomy alignment as a mid-market company involves a step-by-step process to assess sustainability performance, ensure regulatory compliance, and prepare accurate disclosures.

Data collection requirements

The first step is gathering comprehensive data for all activities being assessed. Mid-market companies must collect:

• Financial data
  Turnover, Capital Expenditure (CapEx), and Operational Expenditure (OpEx) linked to the activities under review.
• Operational data
  Activity-specific metrics include energy consumption, waste management practices, and resource use.
• Environmental data
  Carbon footprint, emissions data, biodiversity impact, and energy efficiency levels.
• Social compliance data
  Labor standards, human rights safeguards, and supply chain policies aligned with UN and OECD principles.

Calculation methodologies

Once data is collected, companies must apply standardized methodologies to measure their sustainability performance accurately. The key calculation areas are: 

• Turnover
  Calculate the percentage of total revenue derived from EU Taxonomy-aligned activities.
• CapEx
  Measure investment in projects contributing to sustainability objectives.
• OpEx
  Capture ongoing costs linked to sustainability maintenance and improvement.

Reporting requirements

Mid-market companies must disclose their sustainability performance in a clear, compliant format as required under the CSRD. This report should include:

• Activity classification
  Clearly state eligible vs. aligned activities.
• KPIs
  Report turnover, CapEx, and OpEx figures linked to sustainable activities.
• Methodology used
  Specify calculation methodologies and data sources.
• Compliance declarations
  Confirm adherence to the four conditions of alignment.

If you’re unsure about the CSRD audit requirements, take a look at the Top 25 Frequently Asked Questions for a comprehensive overview of what you can do to prepare and what to expect.

Common pitfalls to avoid

Remember to look out for these common issues when assessing and reporting EU Taxonomy alignment:

• Incomplete data collection
  Missing activity-specific metrics can lead to non-compliance.
• Overreporting eligibility
  Disclosing activities as aligned without passing all four conditions.
• Manual errors
  Relying on spreadsheets instead of automated data tools can result in inconsistencies. Make sure your reports are audit-proof, too.
• Ignoring DNSH requirements
  Activities must avoid harming other environmental objectives.
• Lack of preparation
  Failing to provide data trails and source references can lead to challenges during audits.

EU Taxonomy Alignment with Coolset

Between the start of 2023 and May 2024, €440 billion of Taxonomy-aligned activities were reported, and the number is only expected to rise. If your company wants to join the hundreds of other EU entities making significant capital investments in the environment, you’ll need a tool designed specifically with mid-market companies in mind.

Coolset can conduct double materiality assessments to generate accurate, audit-ready reports, streamlining the entire CSRD compliance process in a single platform—making EU Taxonomy alignment that much smoother. 

Our carbon management methodology is TÜV Rheinland certified, providing a precise view of Scope 1-3 emissions in line with the GHG Protocol. Explore our interactive demo or schedule a free advisory call to see how Coolset can help you meet your 2025 deadlines without the hassle.