The EU Taxonomy: Six Objectives, Technical Screening Criteria, Alignment Percentages and the Gas and Nuclear Debate

What you will learn

• The six environmental objectives and the four conditions an activity must meet to be "aligned".
• The difference between taxonomy-eligible and taxonomy-aligned, and between turnover, capex and opex alignment.
• How to calculate a fund's taxonomy-alignment percentage from company data.
• The conditions under which gas and nuclear activities count, and why this is contested.

Explanation

The EU taxonomy (Regulation (EU) 2020/852) is a classification system defining which economic activities count as environmentally sustainable. It rates activities, not companies, against six objectives:

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems

An activity is taxonomy-aligned only if (1) it makes a substantial contribution to one objective, measured by technical screening criteria (TSC), numerical thresholds in delegated acts (for example, electricity with life-cycle emissions below 100 g CO2e/kWh); (2) it does no significant harm (DNSH) to the other five; (3) the company meets minimum safeguards (human rights, anti-corruption, tax, fair competition); and (4) compliance is verifiable.

Eligible versus aligned

An activity is eligible if it is merely described in the taxonomy (for example, "manufacture of cement"). It is aligned only if it meets the thresholds. Only cement produced below the emission threshold is aligned. Marketing sometimes quotes the much higher eligibility figures; always ask which one.

Three key performance indicators

Companies in scope report the aligned share of turnover (what they sell today), capex (what they invest in) and opex. A utility building wind farms can have 20% aligned turnover but 70% aligned capex. Funds usually report turnover-based alignment; the KPIs are not comparable. Non-EU and small companies often report nothing, so providers estimate or record zero, which pulls fund figures down.

Gas and nuclear

A Complementary Climate Delegated Act, applying since 1 January 2023, added certain gas and nuclear activities as transitional under the mitigation objective. Main conditions:

• Gas-fired power: life-cycle emissions below 100 g CO2e/kWh; or, for plants permitted by 31 December 2030, direct emissions below 270 g CO2e/kWh or averaging no more than 550 kg CO2e per kW of capacity over 20 years, provided the plant replaces a more polluting solid or liquid fossil plant, renewables could not deliver the same output, and it switches fully to renewable or low-carbon gases by end-2035.
• Nuclear: new plants with construction permits granted by 2045 and lifetime extensions approved by 2040, with waste-disposal conditions.

Austria challenged the act; the EU General Court dismissed the action on 10 September 2025, so the rules stand as of 2026, though revisions remain possible. Many investors reject nuclear or gas on principle, so several labels add their own exclusions on top of the taxonomy; "taxonomy-aligned" and "acceptable to you" are not the same test.

Worked example

Hypothetical example, part 1 – fund alignment. A fictional European equity fund has five holding groups. Company alignment is turnover-based and invented.

Fund taxonomy alignment = 4.50 + 1.60 + 0 + 0 + 0.94 = 7.04%. Single-digit figures are typical even for "green" broad funds, because banks and software have no eligible activities and many companies do not report.

Part 2 – a gas plant. A fictional 1,000 MW (1,000,000 kW) gas plant emitting 350 g CO2e/kWh gets its permit in 2028. It fails the 270 g/kWh test. Alternative: allowed average = 550 kg/kW × 1,000,000 kW = 550,000 t CO2e per year. Running 2,000 hours a year: 1,000,000 kW × 2,000 h = 2,000,000,000 kWh × 0.35 kg = 700,000 t, above the limit, so not aligned. Running only 1,500 hours as back-up: 1,500,000,000 kWh × 0.35 kg = 525,000 t, below 550,000 t, so it passes this test if the replacement, renewables and 2035 fuel-switch conditions are also met.

Assumptions: constant emission factor, no part-load effects; the point is that the 20-year rule favours plants that run few hours.

Common mistake

Practice activity

On paper: a fund holds a wind developer (weight 12%, 90% aligned turnover), a steel maker (18%, 10%), an insurer (30%, 0%) and a basket of others (40%, 3%). (a) Calculate the fund's taxonomy alignment. (b) The steel maker reports 60% aligned capex. Which figure shows where the company is heading, and why not mix the two?

Key takeaways

• Alignment needs substantial contribution (TSC thresholds), DNSH, minimum safeguards and verification; eligibility alone means nothing.
• Turnover, capex and opex alignment answer different questions; do not mix them.
• Fund alignment = Σ weight × company alignment; single-digit figures are normal because many sectors have no eligible activities.
• Gas (270 g/kWh or 550 kg/kW over 20 years, permit by 2030, fuel switch by 2035) and nuclear (permits by 2045/2040) count as transitional; upheld in court in 2025, but check current rules.

Next step

In the next lesson you will use everything so far to detect greenwashing: portfolio look-through, comparing holdings with marketing, the DWS case and a list of questions to ask about any fund.