Why Most Companies Fail EU Taxonomy Alignment After Eligibility

When Deutsche Bank's asset management arm DWS paid €25 million to Frankfurt prosecutors in April 2025 for greenwashing, the penalty capped a three-year investigation into claims that ESG was "an integral part of our DNA," claims prosecutors said "did not correspond to reality." That fine came on top of a $19 million SEC settlement in 2023 for materially misleading statements about the firm's ESG integration controls.

DWS is not a peripheral case. It is a signal of what happens when sustainability disclosures outpace the data architecture, governance processes, and technical rigor required to substantiate them. For companies now confronting EU Taxonomy alignment under the Corporate Sustainability Reporting Directive, the operational lesson is blunt: eligibility is the easy part, and the gap between what a company claims as eligible and what it can defend as aligned is where regulatory, reputational, and capital market risk concentrates.

The Eligibility-to-Alignment Gap Is the Central Risk

The EY EU Taxonomy Barometer 2025, which analyzed disclosures from 332 nonfinancial companies across 20 EU countries, found that average turnover eligibility stood at 36% for FY 2024, while average turnover alignment was just 10%. For capital expenditure, the figures were 46% eligible and only 16% aligned, a 30-percentage-point gap that represents billions of euros in economic activity companies can describe as potentially sustainable but cannot yet prove meets the Taxonomy's technical thresholds. Half of the companies in the sample reported zero aligned turnover. These are not marginal shortfalls. They reflect a structural inability to satisfy the Taxonomy's three cumulative requirements: substantial contribution to at least one of six environmental objectives defined under the EU Taxonomy Regulation, demonstration that the activity does no significant harm (DNSH) to the other five, and compliance with minimum social safeguards anchored in the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

The sectoral distribution of this gap matters for strategic planning. The mobility sector exhibited the largest divergence between eligible and aligned turnover (65 percentage points in FY 2023, as reported in the EY Barometer 2024), driven by widespread difficulty meeting technical screening criteria for vehicle manufacturing and transport activities. Construction and real estate followed with a 58-percentage-point gap. Power and utilities was the only sector that consistently converted high eligibility into meaningful alignment, largely because its activities (renewable energy generation, grid infrastructure) map more directly onto the Taxonomy's climate mitigation criteria. For companies outside these sectors, particularly in consumer products, technology, and healthcare, the Taxonomy's coverage of their core business activities remains limited, and the temptation to overstate alignment, or conflate eligibility with alignment in investor communications, is exactly the kind of behavior regulators are now equipped to penalize.

Omnibus Simplification Changes the Scope, Not the Standards

The regulatory landscape for Taxonomy reporting shifted substantially during 2025. The European Commission's Omnibus Simplification Package, proposed in February 2025, triggered two parallel legislative tracks. The first, the "Stop-the-Clock" Directive, was adopted on April 14, 2025, published in the Official Journal on April 16, 2025, and delays CSRD reporting by two years for Wave 2 companies (originally due to report in 2026 for FY 2025) and Wave 3 listed SMEs. Wave 1 entities, large public-interest companies already reporting under the former NFRD, remain on schedule.

The second track, the substantive "Content Proposal," reached a provisional agreement between the European Parliament and Council in December 2025. Under the agreed terms, CSRD scope narrows to EU companies with more than 1,000 employees and net turnover exceeding €450 million, a threshold that, according to the European Parliament, removes approximately 90% of previously covered entities. The Omnibus directive was formally adopted by the Council on February 24, 2026, and published in the Official Journal on February 26, 2026, with provisions related to CSRD to be transposed by Member States within 12 months.

For Taxonomy reporting specifically, the Omnibus introduces a 10% de minimis materiality threshold, meaning companies can exclude activities representing less than 10% of turnover, CapEx, or OpEx from detailed Taxonomy assessment. Reporting templates have been consolidated, with data points reduced by approximately 64% according to the EY EU Taxonomy Barometer 2025. And the Commission has introduced the concept of voluntary "partial alignment" reporting, allowing companies that meet some, but not all, technical screening criteria to indicate partial compliance.

The operational implication for in-scope companies is counterintuitive: narrower scope and simplified templates do not reduce the technical rigor required for the activities that remain in scope. If anything, with fewer companies reporting, the activities that are reported will receive greater scrutiny from auditors, investors, and regulators. The assurance bar is already rising. According to the EY Barometer, 86% of in-scope companies received limited or reasonable assurance on their FY 2024 Taxonomy disclosures, and this first mandatory assurance cycle exposed significant gaps in audit trails, particularly for environmental objectives beyond climate change mitigation.

If your organization is still determining whether its activities are Taxonomy-eligible, or whether your data is sufficient to support an alignment claim, our Regulatory Readiness Assessment can help you identify which disclosure requirements apply and where your preparation gaps are before the next reporting cycle.

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DNSH and Minimum Safeguards: Where Alignment Claims Break Down

The most persistent operational failure in Taxonomy alignment is not the inability to demonstrate substantial contribution. It is the inability to pass the DNSH and minimum safeguards tests that must accompany every substantial contribution claim. A December 2024 AFME review of DNSH assessment practices found that 93% of surveyed banks viewed data availability as one of the greatest hurdles in completing DNSH assessments. The challenge is partly structural: DNSH criteria are activity-specific and reference EU environmental legislation (the Water Framework Directive, the Waste Framework Directive, the Industrial Emissions Directive, among others), requiring companies to demonstrate compliance with regulatory standards that their operational teams may never have mapped against Taxonomy requirements.

Consider a concrete example. Activity 4.1 under the Climate Delegated Act, electricity generation using solar photovoltaic technology, requires a DNSH assessment against both circular economy and biodiversity objectives, as detailed in the Climate Delegated Act. For circular economy, the company must assess the durability and recyclability of equipment. For biodiversity, it must demonstrate compliance with environmental impact assessment requirements and mitigation measures in biodiversity-sensitive areas. These are not tick-box exercises. They require documented evidence, specific to each facility or project, that can withstand auditor review. A solar installation in Portugal faces different biodiversity thresholds than one in Finland, and the DNSH evidence must reflect that.

Minimum safeguards present a different but equally underestimated challenge. The EU Taxonomy Regulation's Article 18 requires alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the eight fundamental ILO conventions.

The European Commission's June 2023 clarification specified that companies must implement due diligence and remedy procedures, not merely declare adherence. For multinationals with complex supply chains, this means the human rights due diligence process, its documentation, its remediation mechanisms, and its governance oversight, must be demonstrably functional and traceable. The interaction with the Corporate Sustainability Due Diligence Directive (CSDDD), which under the Omnibus agreement will apply to companies with over 5,000 employees and €1.5 billion in revenue from 2029, creates an overlapping set of due diligence obligations that can either reinforce one another or, if treated as separate compliance workstreams, generate contradictory internal processes.

The Enforcement Landscape Is Becoming Concrete

While CSRD enforcement by national competent authorities is still developing, the broader enforcement environment for environmental claims has sharpened considerably. The European Securities and Markets Authority's June 2024 final report on greenwashing noted that while formal enforcement decisions remain limited, national competent authorities have started relying on existing rules prohibiting misleading information to supervise sustainability disclosures. Italy's competition authority (AGCM) fined Shein €1 million in August 2025 for misleading environmental claims, finding that its sustainability messaging was "vague, generic, and/or overly emphatic" and that its emissions reduction targets were "contradicted by an actual increase in Shein's greenhouse gas emissions in 2023 and 2024." That fine followed a €40 million penalty from France's competition authority for misleading commercial practices. The DWS case, combining a $19 million SEC settlement with a €25 million Frankfurt prosecutor's fine, demonstrated that greenwashing enforcement now operates across jurisdictions simultaneously.

The EU's Directive on Empowering Consumers for the Green Transition (informally known as the Greenwashing Directive), which Member States must transpose by March 2026 and apply by September 27, 2026, introduces a new category of prohibited practices, including a blanket prohibition on "carbon neutral" claims based on carbon offsets rather than actual emissions reductions. The European Commission's December 2025 guidance clarified that while mandatory sustainability reporting under CSRD is not itself within the Greenwashing Directive's scope (because CSRD disclosures are addressed to investors, not consumers), statements that cross from investor-facing reports into marketing materials or corporate websites do fall under scrutiny.

For Taxonomy reporting specifically, the risk is this: a company that reports high alignment percentages in its CSRD filing, then references those percentages in sustainability marketing or investor presentations without adequate context or qualification, may face enforcement under both CSRD assurance requirements and the Greenwashing Directive's consumer protection framework.

A Decision Framework for Taxonomy Alignment Under the Post-Omnibus Regime

Given the shifting regulatory environment, companies that remain in scope (or that choose to report voluntarily) need a structured approach to Taxonomy alignment that balances rigor with resource efficiency. The following framework organizes the key decision points.

First, determine which activities warrant full alignment assessment versus de minimis exclusion. Under the Omnibus amendments, activities representing less than 10% of turnover, CapEx, or OpEx can be reported as non-material and excluded from detailed assessment. This threshold should be applied strategically, not automatically. An activity that represents 8% of turnover but is central to the company's green bond framework or sustainability-linked loan covenants may warrant full alignment assessment regardless of the de minimis threshold, because capital markets counterparties will expect it. The decision point is whether the activity is "decision-grade" for any external stakeholder, meaning sufficiently material that an investor, lender, or auditor would rely on the alignment claim when making a financial decision.

Second, separate substantial contribution screening from DNSH and minimum safeguards assessment, and resource them differently. Substantial contribution criteria are typically quantitative and activity-specific (energy efficiency thresholds, emissions intensity benchmarks, resource use ratios). These can be assessed by sustainability or engineering teams with access to operational data. DNSH assessment, by contrast, requires cross-referencing operational data against EU environmental legislation that may be unfamiliar to sustainability teams, and it requires facility-level or project-level evidence. Minimum safeguards assessment is a governance and legal exercise that depends on the maturity of human rights due diligence processes. Companies that treat all three as a single workstream typically bottleneck on DNSH, where data collection takes the longest and requires coordination across operations, legal, procurement, and environmental health and safety functions.

Third, adopt a "fast to fail" approach for activities where alignment is unlikely. The EY US Taxonomy readiness analysis noted that companies are looking for rapid initial screening to identify activities where one or more alignment criteria clearly cannot be met, so they can report zero alignment and redirect resources to activities where alignment is achievable or strategically important. This is not an invitation to under-report. Rather, it is a resource allocation discipline. If a preliminary screen reveals that an activity fails the DNSH test on biodiversity because the company has no environmental impact assessment for a key facility, the right response is to report zero alignment and flag the biodiversity gap as a CapEx planning issue, not to attempt to argue around the deficiency.

Fourth, build the audit trail before, not after, the alignment claim. The first mandatory assurance cycle in FY 2024 demonstrated that auditors require granular, traceable documentation for every alignment element, not summary assertions. "Defensible" in this context means that each alignment claim can be traced to a specific data source, validated against the applicable technical screening criteria, and reviewed by an individual with documented authority to approve the disclosure. Companies that assembled their Taxonomy disclosures retrospectively from aggregated data found themselves unable to satisfy auditor evidence requests, particularly for the four environmental objectives beyond climate change (water, circular economy, pollution, biodiversity), where the Environmental Delegated Act applied from January 2024 and data collection processes were less mature.

Fifth, integrate Taxonomy governance with CSRD materiality and CSDDD due diligence. The Taxonomy's minimum safeguards overlap substantially with CSDDD due diligence requirements. The DNSH criteria for pollution prevention reference the same EU directives that inform ESRS E2 (Pollution) disclosures. Treating these as separate compliance projects creates duplicative data collection, inconsistent internal conclusions, and governance confusion about which team owns which disclosure. The structural solution is a single sustainability data governance function that feeds Taxonomy, ESRS, and due diligence reporting from a shared data layer, with clear escalation paths for activities where the data does not support the claim.

From Analysis to Action

The core challenge this analysis surfaces is not regulatory complexity for its own sake. It is the gap between what companies can identify as potentially sustainable economic activity and what they can document, defend, and assure as genuinely aligned under the EU Taxonomy's technical requirements. Closing that gap requires changes to data architecture, cross-functional governance, supplier engagement, and assurance readiness that go well beyond compliance planning. It requires building an internal system capable of producing Taxonomy disclosures that are accurate at the activity level, traceable to source data, and consistent with the company's broader CSRD and due diligence obligations.

At Gasilov Group, our EU Taxonomy Alignment Diagnostic maps each in-scope economic activity against applicable technical screening criteria, DNSH requirements, and minimum safeguards. The engagement begins with an activity-level eligibility and alignment screen, identifies the specific data gaps and governance deficiencies preventing alignment, and delivers a prioritized remediation roadmap tied to your reporting timeline. Get in touch to schedule a scoping call.

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Written by: Gasilov Group Editorial Team

Reviewed by: Arif Gasilov, Partner, Climate & Environmental Reporting

Leads CSRD and ESRS alignment, double materiality assessments, emissions baselining, and climate risk mapping, with hands-on experience across corporate and public sector sustainability engagements in North America and Europe.

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Frequently Asked Questions (FAQ):

What is the difference between EU Taxonomy eligibility and alignment, and why does the gap matter for CSRD reporting?

Eligibility means an economic activity is listed in the Taxonomy Delegated Acts as potentially contributing to one of six environmental objectives. Alignment requires meeting three additional, cumulative tests: substantial contribution criteria (quantitative thresholds specific to each activity), DNSH criteria for the remaining five environmental objectives, and compliance with minimum social safeguards. The gap matters because many companies have reported high eligibility figures that create investor expectations of strong sustainability performance, while actual alignment, which is what the Taxonomy is designed to measure, remains far lower. Under the revised Omnibus rules, the Commission is also developing the concept of "partial alignment" to credit activities that meet some but not all technical screening criteria, though the precise implementation details are still being finalized through delegated acts expected in 2026.

How does the Omnibus Simplification Package change EU Taxonomy reporting obligations for companies below the new thresholds?

Companies with fewer than 1,000 employees or net turnover below €450 million are no longer required to report Taxonomy alignment under the revised CSRD. However, these companies may face indirect pressure to report voluntarily if they are part of the value chain of in-scope companies, if they seek sustainability-linked financing, or if they participate in green bond programs that reference Taxonomy alignment as a use-of-proceeds criterion. The Omnibus also introduced voluntary reporting standards being developed by EFRAG that smaller companies can use to limit the information that larger value chain partners can request from them. Companies that invested in Taxonomy reporting infrastructure before the scope change should evaluate whether voluntary reporting provides strategic advantage in capital markets or supply chain relationships before discontinuing the effort.

Which EU Taxonomy environmental objectives are hardest to demonstrate alignment with, and why?

Climate change mitigation remains the most reported objective, and the one with the most mature technical screening criteria and data infrastructure. The four environmental objectives added through the Environmental Delegated Act in November 2023, covering sustainable use of water resources, transition to a circular economy, pollution prevention, and biodiversity protection, are substantially more difficult. The DNSH criteria for these objectives reference specialized EU environmental regulations (such as the Water Framework Directive and the Industrial Emissions Directive) that require facility-level compliance evidence most companies have not collected in a format compatible with Taxonomy reporting. The European Commission's ongoing review of DNSH criteria, expected to produce revised delegated acts in the second quarter of 2026, aims to simplify some of these requirements, but the fundamental challenge of producing facility-level environmental evidence will persist.

Can a company face enforcement action specifically for incorrect EU Taxonomy reporting?

CSRD mandates limited assurance on sustainability disclosures, including Taxonomy KPIs, for in-scope companies. If an auditor identifies a material misstatement in Taxonomy alignment figures, the company would need to restate. National competent authorities have enforcement powers under CSRD transposition laws, though formal enforcement precedent is still limited. Beyond CSRD-specific enforcement, the broader greenwashing enforcement environment creates additional risk: if Taxonomy alignment figures are referenced in marketing materials, investor presentations, or bond documentation, they may be subject to scrutiny under the EU Greenwashing Directive (applicable from September 2026), national advertising standards, securities regulation, or contract law. The DWS case demonstrated that enforcement can come from multiple regulators simultaneously, both within the EU and in other jurisdictions like the United States.

How should companies prioritize which economic activities to assess for Taxonomy alignment first?

Prioritization should be driven by three factors: financial materiality (activities representing the largest share of turnover, CapEx, or OpEx), strategic relevance (activities tied to green finance instruments, sustainability-linked lending covenants, or investor commitments), and feasibility (activities where the company has reasonable confidence it can assemble the evidence to demonstrate alignment). Starting with the activities most likely to achieve full alignment allows the company to build internal capability and audit trail practices before tackling more complex assessments. Activities where preliminary screening suggests DNSH or minimum safeguards compliance is unlikely should be reported at zero alignment in the current cycle and flagged for remediation in subsequent periods.