EU Taxonomy: Eligibility vs. Alignment – Understanding the Difference

The EU Taxonomy is a critical framework in sustainable finance, helping investors, businesses, and policymakers determine what constitutes environmentally sustainable economic activity. 

However, two key concepts within the Taxonomy—eligibility and alignment—often create confusion. While eligibility is an initial categorization, alignment requires a deeper assessment of an activity's environmental performance. Today, we’ll explore the fundamental differences between EU Taxonomy eligibility and alignment, why they matter, and how companies and investors should approach them.

1. What is EU Taxonomy Eligibility

Eligibility means that an economic activity is included in the EU Taxonomy's scope—meaning it falls under one of the sectors or activities covered by the regulation. However, eligibility alone does not indicate that an activity is sustainable.

Key Aspects of Eligibility:

• The activity is listed in the EU Taxonomy as potentially sustainable.
• It can be assessed further for alignment.
• Being eligible does not automatically mean the activity is environmentally sustainable.

Practical Eligibility Example:
A company involved in renewable energy production (e.g., offshore or onshore wind farms) would be Taxonomy-eligible because wind energy is included in the framework.

2. What is EU Taxonomy Alignment

Alignment takes eligibility a step further. For an activity to be considered Taxonomy-aligned, it must meet additional, stricter criteria beyond just being listed.

Key Criteria for Alignment:

1. Substantial Contribution to Environmental Objectives
   The activity must significantly contribute to at least one of the six environmental objectives:
   
   • Climate change mitigation
   • Climate change adaptation
   • Sustainable use of water and marine resources
   • Transition to a circular economy
   • Pollution prevention and control
   • Protection of biodiversity and ecosystems
2. Do No Significant Harm (DNSH) Principle
   The activity must not harm any of the other five environmental objectives.
3. Minimum Social and Governance Safeguards
   The company must adhere to OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, and ILO conventions.
4. Technical Screening Criteria (TSC) Compliance
   The activity must meet specific performance thresholds set by the EU.

Practical Alignment Example:
A wind farm is Taxonomy-aligned if it meets the above criteria, including avoiding harm to biodiversity (e.g., not disrupting bird migration patterns), complying with social safeguards, and meeting EU performance thresholds for emissions and efficiency.

3. The Relationship Between Eligibility and Alignment

Eligibility is the first step, while alignment is the final goal for a company or investor seeking sustainability classification under the EU Taxonomy (Table 1).

Table 1: Comparison between Taxonomy Eligibility and Alignment 

4. Why the Difference Matters for Investors and Companies

For investors, eligibility helps screen potential investments, but alignment determines whether an investment can be classified as environmentally sustainable under SFDR.

For companies, distinguishing between eligibility and alignment is crucial for sustainability reporting under the CSRD. They must disclose the percentage of their revenue, CapEx, and OpEx that is both Taxonomy-eligible and aligned.

5. Conclusion

The distinction between EU Taxonomy eligibility and alignment is essential for understanding sustainable finance regulations. While eligibility determines whether an activity can be considered within the Taxonomy’s framework, alignment confirms that it genuinely contributes to sustainability. As the EU pushes for greater transparency and green investments, businesses and investors must focus on moving beyond eligibility towards full alignment to meet sustainability goals and regulatory requirements.

How Datia can help 

Understanding and reporting on EU Taxonomy eligibility and alignment can be complex—but Datia simplifies the process. Our platform helps companies and investors accurately assess which economic activities are eligible under the EU Taxonomy and guides them through the deeper requirements for alignment. From mapping activities to the Taxonomy framework to checking compliance with the Technical Screening Criteria and DNSH principles, Datia enables efficient, audit-ready reporting. Whether you're navigating SFDR or CSRD obligations, Datia empowers you to move beyond eligibility and achieve meaningful sustainability alignment.

Learn about the EU Taxonomy Module.

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