We often get asked why certain industries are not included in the EU Taxonomy and what that means for companies, investors, and fund managers trying to navigate sustainable finance regulations. Since this question comes up so frequently, we decided to provide a more in-depth explanation than what we can typically cover in a quick call. Let’s dive in.

‍

Eligibility

The EU Taxonomy was developed to create a science-based classification system for sustainable economic activities. Its goal is to help investors, businesses, and policymakers determine which activities contribute to the EU’s climate and environmental objectives, such as climate change mitigation, pollution prevention, and biodiversity protection.

However, not every industry or business model has been included, leading to significant debate, especially among companies that believe they contribute to the green transition but cannot prove it, since there is no criteria assigned to their business activities. The EU Taxonomy does not aim to classify all economic activities, only those that can objectively be considered sustainable under strict scientific and technical criteria.

Therefore, eligibility refers to whether an economic activity is covered by the EU Taxonomy’s list of sectors and activities. It does not mean that the activity is necessarily sustainable, just that it has been identified as having the potential to contribute to environmental objectives.

When determining which activities to include, the EU relied on scientific and technical assessments conducted by the Technical Expert Group (TEG), and later the Platform on Sustainable Finance analysed industries based on their environmental impact and contribution to sustainability goals.

Some industries were included based on their role in achieving the EU Green Deal and net-zero targets by 2050. Others were excluded because they were deemed to have no significant contribution to sustainability or because they were too controversial to classify under a unified approach. That being said, the inclusion (or exclusion) of certain activities was not purely a scientific decision; some industries lobbied heavily for or against their inclusion. This was especially visible in cases like natural gas, nuclear power, and aviation, where political and economic considerations influenced the final outcome.

The main reasons for excluding certain industries were:

• Some industries, like gambling or tobacco, do not directly contribute to any environmental objectives, so they were left out.
  ‍
• Sectors like mining and certain manufacturing activities were initially excluded because their environmental impact is difficult to quantify in a standardised way.
  ‍
• Some activities, like large-scale agriculture, might contribute positively in some ways (e.g., organic farming), but they also have potential negative effects (e.g., deforestation, water pollution) that prevent their classification as sustainable.
  ‍
• Some industries, such as nuclear energy and natural gas, sparked intense debates. They were initially left out due to environmental concerns but later added under specific conditions due to pressure from Member States.

The EU Taxonomy is designed to be a living framework, meaning it will continue to evolve. Updates from the Platform on Sustainable Finance, policy shifts, and industry lobbying efforts will shape which sectors get included in the next revisions. For businesses and investors, staying ahead of these changes is crucial to anticipating new sustainable investment opportunities and compliance requirements. Ongoing discussions around harmonising the Taxonomy with global sustainability frameworks (such as the ISSB and SEC rules) may also influence future sector classifications.

‍

What if my activity is not eligible?

Being excluded from the EU Taxonomy does not mean your business activity is inherently unsustainable, nor does it mean you cannot access green finance. The EU Taxonomy is a classification system that determines which activities are officially recognised as making a substantial contribution to environmental objectives, but it is not the only framework available for demonstrating sustainability.

For example, if your business focuses on eco-friendly textiles, you might not find your exact activity listed in the EU Taxonomy. However, this does not mean your company cannot attract sustainable investors or qualify for ESG-aligned financing.

While the EU Taxonomy is important, the Sustainable Finance Disclosure Regulation (SFDR) provides additional categories that allow businesses and investment funds to demonstrate their sustainability credentials, even if their activities are not Taxonomy-aligned. Such businesses can still demonstrate a positive environmental or social impact under the SFDR’s broader categories and rely on other sustainable finance frameworks beyond the EU Taxonomy, such as national green labels or global ESG standards.

Admittedly, such activities cannot be categorised as #1A Sustainable, in conformity with the SFDR. However, they could belong to the category #1B Other E/S characteristics, which "comprises investments that are aligned with the environmental or social characteristics that do not qualify as sustainable investments". While Taxonomy-aligned investments require a substantial contribution to sustainability, #1B investments only need to show that they promote environmental or social characteristics.

A company can prove its alignment with #1B Other E/S Characteristics by:

• Implementing measurable ESG policies and initiatives.
• Tracking and reporting impact.
• Applying screening or exclusion criteria to ensure alignment with sustainability objectives.
• Considering broader social and governance impacts beyond just environmental efforts.

‍

Alignment

An eligible activity is therefore one that is listed in the EU Taxonomy's framework. Taxonomy eligibility is an important first step, it tells companies and investors whether an activity is within the scope of sustainable finance discussions. Taxonomy alignment determines whether an activity can be officially labeled as sustainable. Eligible activities have been assigned a set of criteria based on their particular processes or impact on the environment.

For an economic activity to be Taxonomy-aligned, it must meet the following four key criteria:

1. ‍Substantial Contribution: The activity must make a substantial contribution to at least one of the six environmental objectives defined in the EU Taxonomy. Each eligible activity has technical screening criteria that define what qualifies as a “substantial contribution".‍
2. Do No Significant Harm ('DNSH'): The activity must not cause harm to any of the other five environmental objectives. For example, a solar panel manufacturer contributes to climate mitigation but must also ensure its supply chain does not cause significant pollution or harm biodiversity. The DNSH assessment also follows specific technical criteria set for each activity.‍
3. Minimum Social and Governance Safeguards: The activity must comply with key human rights, labor rights, and responsible business conduct standards, including:

• OECD Guidelines for Multinational Enterprises.
• UN Guiding Principles on Business and Human Rights.
• International Labour Organization (ILO) Core Conventions.

This ensures that an environmentally sustainable activity does not involve human rights abuses, unfair labor practices, or governance failures.

‍

How it all Comes Together

To determine their eligibility, companies must assess which of their activities fall under the EU Taxonomy based on their NACE codes. If 50% of a company's revenue comes from activities listed in the Taxonomy, only that portion can be tested for Taxonomy-alignment. To determine that alignment, the activity must meet all the criteria prescribed in the EU Taxonomy: substantial contribution, DNSH and minimum safeguards.

For example, if a company in the packaging manufacturing sector wants to be recognised as sustainable, one of the ways to demonstrate a substantial contribution to the circular economy objective is to prove that 65% of its products are made from recycled materials. Additionally, it must provide evidence that its processes are not undermining any of the other five environmental objectives and comply with the abovementioned social standards.

To better illustrate this process, see the picture below.

‍

‍

414 can assist you in identifying and disclosing your EU Taxonomy eligibility and alignment.

‍