New EU Taxonomy Rules: The Delicate Balance Between Green Ambition and Pragmatism

The Green Blueprint: From Ideal to Reality 

The EU Taxonomy, established in 2020 (Regulation 2020/852), is the cornerstone of the European Green Deal. Its primary ambition is to create a unified classification system to guide investments towards sustainable economic activities, combat "greenwashing", and propel the EU towards carbon neutrality by 2050. An activity is defined as "sustainable" if it contributes substantially to at least one of the following six environmental objectives:    

• Climate change mitigation 

• Climate change adaptation 

• Sustainable use and protection of water and marine resources 

• Transition to a circular economy 

• Pollution prevention and control 

• Protection and restoration of biodiversity and ecosystems. 

The activity must also respect the "Do No Significant Harm" (DNSH) principle to other objectives, and adhere to fundamental human rights and labor standards.    

Despite this bold vision, the Taxonomy has faced practical challenges. Its complexity, the heavy reporting requirements, and difficulties in application and international coordination were quickly highlighted by market players. This gap between ambitious regulation and operational reality rendered the framework, though hailed as a "gold standard", potentially counterproductive.    

This is why the European Commission reacted. In February 2025, it launched the "Omnibus I package" — a series of measures aimed at simplifying the Taxonomy's application, easing the administrative burden, and strengthening EU competitiveness — which was adopted on July 4, 2025. These revisions, in the form of a Delegated Act, are expected to enter into force on January 1, 2026, covering disclosures for the 2025 financial year. The EU thus seeks to strike a balance between regulatory effectiveness and ease of use.    

An Overview of Key Measures 

The new rules introduce significant adjustments, orienting Taxonomy reporting towards a more proportionate and targeted approach: 

• A materiality threshold is introduced. Non-financial companies can omit detailed Taxonomy assessments for activities where aggregated turnover, capital expenditure (CapEx), or operational expenditure (OpEx) represents less than 10% of the company's total. Financial institutions benefit from similar exemptions for calculating key performance indicators (KPIs) like the Green Asset Ratio (GAR). However, these non-material activities must still be disclosed separately in the reporting templates.    

• Reporting data points are drastically reduced. The number of data points required in reporting templates is decreased by 64% for non-financial companies and 89% for financial companies. This measure aims to simplify data processing and promote automated reporting.    

• The DNSH principle is simplified. The "Do No Significant Harm" (DNSH) requirements, particularly for pollution prevention and control, are clarified and restricted, focusing on a shorter list of substances to reduce legal uncertainty. The requirement to screen for self-classified substances is also removed.    

• Reporting thresholds are adjusted. The reporting thresholds for the Corporate Sustainability Reporting Directive (CSRD) are raised: from 500 to over 1000 employees, combined with a revenue criterion of over €450 million. The Commission estimates this will reduce the number of companies subject to mandatory reporting by 80%.    

• An optional deferral is granted to financial institutions. Financial companies can defer detailed Taxonomy KPI reporting for two years (until end of 2027), provided they declare that their activities do not claim alignment with the Taxonomy.    

• Concrete benefits for SMEs. Companies falling below the new thresholds (fewer than 1,000 employees or revenue below €450 million) are exempt from mandatory reporting, which is expected to reduce their workload by 35%. Unlisted SMEs also benefit from a simplified voluntary approach, focused on a limited set of metrics for climate contributions and removing DNSH/Minimum Social Safeguards (MSS) assessments, aiming to improve their access to green finance.    

Alleviating the Burden and Preserving Green Ambition 

These simplification measures, while offering significant relief, also raise questions about the integrity and effectiveness of the EU's sustainable finance program. 

On the one hand, the benefits of this simplification are clear. The reduction in administrative burden is the most obvious benefit, with estimated annual savings of over €6 billion in administrative costs. This allows companies to reallocate resources to their core activities and transition efforts. The introduction of materiality thresholds and the reduction of data points help companies focus on activities that have a significant environmental impact, a proportionate reporting approach perceived as a sign of regulatory maturity. For SMEs, easing the reporting burden and introducing simplified methods should facilitate their access to green and transition finance. Finally, these changes offer an opportunity to improve coordination between EU Taxonomy disclosures and CSRD/SFDR reporting, potentially reducing duplication across sustainability frameworks.    

On the other hand, significant concerns and criticisms are emerging. Voices are being raised, notably from the EU Platform on Sustainable Finance and various NGOs, warning that reducing the scope and introducing materiality thresholds could "seriously undermine the Taxonomy's role as an innovative tool to steer investment and track capital flows," or even "open the door to greenwashing." The European Securities and Markets Authority (ESMA) has also suggested that cutting "red tape" could "delay the green transition". The decrease in the number of reporting entities and data points risks leading to "significant data loss", making it harder for investors to compare companies and fulfill their own SFDR obligations, which "diminishes the decision-usefulness of the data". Paradoxically, despite the goal of simplification, new exemptions and definitions, such as the 10% materiality threshold, could introduce "another layer of complexity" from a legal and operational perspective, with the administrative burden not disappearing but changing in nature. A consortium of eight NGOs — including ClientEarth, Anti-Slavery International, and Clean Clothes Campaign — lodged a formal complaint with the European Ombudsman on April 18, 2025, condemning the "undemocratic, untransparent and rushed" manner in which the Commission developed the Omnibus proposal. They asserted that this "so-called simplification does nothing to enhance competitiveness" and "weakens sustainability rules".    

These simplification measures are closely linked to the explicit goals of strengthening EU competitiveness and reducing "red tape". This reflects a political priority, particularly in response to industry criticisms of "over-regulation". The simplification package is a political compromise, seeking to "strike the right balance between reducing excessive administrative burden for our companies, while keeping our longer-term goals in focus". Its long-term success will depend on its ability to genuinely foster competitiveness without compromising the credibility and effectiveness of the sustainable finance framework, crucial for attracting green capital.    

Navigating Green Finance's Future 

The new rules will prompt strategic adjustments for businesses and financial institutions, while also influencing the EU's position in global sustainable finance. 

Impact on Businesses:  

• Companies newly excluded from mandatory reporting should assess whether voluntary reporting under simplified standards can provide a competitive advantage, for example in terms of brand value, investor confidence, and access to capital. Those remaining within the mandatory scope will need to update their internal reporting systems and data management processes to adapt to reduced requirements and new materiality thresholds.    

Impact on Investors and Financial Markets:  

• While financial institutions benefit from reduced data points and optional deferrals, they may face challenges in obtaining comprehensive, comparable data from investee companies, particularly those no longer subject to mandatory reporting. This could affect the accuracy and comparability of key indicators like the Green Asset Ratio (GAR). The market may need to develop new data estimation methods or rely on alternative data sources to fill information gaps. The significant reduction in the scope of mandatory reporting (80% of companies no longer subject to CSRD ) suggests a future "two-tiered" reporting landscape: large companies will remain under strict mandatory reporting, while smaller entities may opt for voluntary reporting to meet investor or stakeholder expectations for sustainable finance.    

EU's Global Leadership in Sustainable Finance:  

• The EU has positioned itself as a global leader in sustainable finance. These simplification measures, while addressing domestic concerns, will be closely watched by other jurisdictions. The balance struck between regulatory burden and environmental ambition could serve as a model or a cautionary tale in the evolution of global ESG standards. This debate also highlights the difficulty of achieving international interoperability when domestic frameworks undergo significant changes. The optional two-year deferral for detailed financial KPI reporting suggests a shift towards flexibility and proportionality, with potentially more "comply or explain" mechanisms in the future.     

Unlock Green Opportunities with DT Master Carbon 

The evolving EU Taxonomy isn't just about compliance; it's a pivotal moment for businesses to embed sustainability and transparency at their core. We see regulatory shifts like the Taxonomy's simplification as key opportunities for your strategic advantage. 

At DT Master Carbon, we empower clients to lead in this complex landscape. We help you: 

• Navigate evolving sustainability regulations. 

• Assess green finance innovations for strategic growth. 

• Communicate your sustainable leadership effectively, aligning with Taxonomy requirements. 

Ready to turn EU Taxonomy complexities into your competitive edge? Contact DT Master Carbon today to co-develop your sustainable roadmap.