In the dynamic landscape of sustainable finance, the European Union has taken a significant step forward with the introduction of the EU Taxonomy – a pivotal component of the Sustainable Finance Framework. This comprehensive framework aims to redefine how sustainability is measured, disclosed, and integrated for companies into the financial decision-making processes of investors.
Let’s explore why it matters to your business, the nuances of the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), and their intertwined significance.
Table of Contents
Understanding the EU Taxonomy: let’s dive in
What is the EU Taxonomy?
The EU Taxonomy serves as a classification system to assist companies and investors in identifying environmentally . It provides clear criteria for what qualifies as environmentally sustainable, promoting transparency and informed investment decisions.
How is EU taxonomy linked to sustainable finance?
The EU Taxonomy is a key part of sustainable finance, offering a standardized way to categorize eco-friendly economic activities. It helps financial institutions easily identify and support investments aligned with the EU’s sustainability objectives. To support and encourage sustainable investments, the European Union has laid down two key elements in its Sustainable Finance Framework:
- the EU Taxonomy,
- sustainability reporting (CSRD – Rules on Disclosures and Reporting)
Is the EU Taxonomy mandatory?
Importantly, it is not mandatory for investors, and it does not impose performance requirements on companies or financial products. Instead, it encourages a gradual shift towards sustainability in alignment with EU environmental objectives. This technology-neutral framework facilitates industry transitions, enhances transparency through disclosures, and is regularly updated to reflect technological advancements and policy changes.
What are the advantages of the EU Taxonomy?
The EU Taxonomy supports the European Green Deal by serving as a reliable reference, assisting in planning sustainable transitions, preventing greenwashing, and accelerating funding for sustainable projects. It addresses the climate crisis and environmental degradation by aiding the transition to a zero-carbon future.
The EU Taxonomy supports the European Green Deal by serving as a reliable reference for investors and companies, with the goal to:
- assist in planning and financing sustainable transitions,
- preventing greenwashing practices,
- accelerating funding for sustainable projects.
By aiding the transition to a zero-carbon future, the EU Taxonomy addresses the pressing issues of the climate crisis and environmental degradation.
The significance of the EU Taxonomy
The link between the EU Taxonomy and sustainability standards reporting, particularly under the Corporate Sustainability Reporting Directive (CSRD), is crucial in shaping a comprehensive framework for businesses to communicate their environmental performance and adherence to sustainable practices. The EU Taxonomy and CSRD work in tandem to drive a paradigm shift towards sustainability and responsible corporate behaviour.
Transparency and comparability
The EU Taxonomy aims to enhance transparency and comparability by providing a standardised framework for companies to disclose their sustainability achievements. This aligns with the objectives of the CSRD, which seeks to standardise the reporting of non-financial data. By following the European Sustainability Reporting Standards (ESRS) under the CSRD, companies can ensure that their sustainability disclosures are in line with a common set of guidelines, making it easier for investors and stakeholders to compare and evaluate sustainability risks.
Access to finance
Companies that align with the EU Taxonomy are likely to attract investments from those seeking to support sustainable endeavours. Furthermore, the CSRD reinforces this by requiring companies to include a non-financial statement in their management report, covering environmental, social, and governance (ESG) elements. Investors are increasingly considering ESG factors in their decision-making processes, and companies conforming to the EU Taxonomy criteria and CSRD standards are better positioned to attract funds from sustainability-focused investors.
Stimulating innovation
The EU Taxonomy encourages companies to explore and adopt new sustainable technologies and business models. This drive towards innovation is complemented by the CSRD’s focus on reporting targets and progress of sustainability initiatives. By integrating these aspects into their reporting, companies can showcase their commitment to innovation in sustainable practices, meeting the expectations set by both the EU Taxonomy and CSRD.
Double materiality and holistic reporting
The CSRD introduces the concept of double materiality, requiring companies to report not only on the impact of environmental changes on their business but also on the impact of their operations on the environment. This aligns with the EU Taxonomy’s criteria for environmentally sustainable economic activities. The CSRD, by mandating reporting on both aspects, ensures that companies provide a comprehensive view of their sustainability performance, fostering accountability and responsible business practices.
Meeting EU Taxonomy criteria: data requirements and evaluation process
Activities are evaluated based on specific NACE codes, which is a Statistical Classification of Economic Activities. For example, the NACE code for the manufacture of ice cream is 10.52. This code indicates that ice cream manufacturers are classified in the manufacturing division (10), the manufacture of dairy products group (5), and the manufacture of ice cream (2).
What are the six pillars of the EU Taxonomy?
The EU Taxonomy outlines six environmental objectives that determine the eligibility of the various NACE codes. These objectives encompass:
- 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.
Economic activities must make a substantial contribution to at least one environmental objective, avoid significant harm to the others, comply with minimum safeguards in the conduct of the activity, and adhere to technical screening criteria set out in the Taxonomy delegated act.
For activities related to climate change mitigation and adaptation, specific performance criteria have been established. These criteria serve as benchmarks to assess whether an economic activity qualifies as environmentally sustainable under the EU Taxonomy. For instance, an activity that could satisfy the technical screening criteria is sustainable agricultural methods. The criteria encompass diminishing the application of pesticides and fertilisers, advocating for soil health and biodiversity, and preserving water resources.
The Corporate Sustainability Reporting Directive (CSRD) – what, why, and for whom?
The Corporate Sustainability Reporting Directive (CSRD) will be applicable as of January 2024. It aims to standardise the reporting of non-financial data, helping investors, civil society organisations, consumers and other stakeholders to evaluate the sustainability performance of companies.
The directive applies to all companies listed on EU-regulated markets and non-capital market-oriented companies meeting certain criteria. Reporting obligations will be phased in from 2024 to 2027. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability, including companies outside the EU.
Under the CSRD, companies must extend their management report with a non-financial statement, following guidelines from the European Sustainability Reporting Standards (ESRS). Reporting requirements include disclosure of environmental, social, and governance (ESG) elements, with new elements such as the process of selecting material topics for stakeholders, targets and progress of sustainability initiatives, and the role of governance bodies.
Furthermore, the concept of double materiality which is introduced by the CSRD requires reporting on both the impact of environmental changes on the business and the impact of operations on the environment.
The EU Taxonomy and CSRD driving business responsibility and competitiveness
In summary, the EU Taxonomy and the CSRD together create a synergistic approach towards promoting sustainability in business. The Taxonomy sets the criteria for environmentally sustainable activities, while the CSRD provides the reporting framework, incorporating these criteria and expanding the scope to cover broader ESG elements.
This integrated approach is instrumental in reshaping the business landscape towards greater sustainability and responsibility. Companies that align with both the EU Taxonomy and the CSRD are likely to enjoy not only regulatory compliance but also a competitive advantage in attracting sustainable investments and meeting the expectations of environmentally conscious investors and consumers.
Who is affected by the EU Taxonomy?
Companies of all sizes, including small enterprises, have the opportunity to utilise the EU Taxonomy to communicate with investors or stakeholders about their current or prospective engagement in taxonomy-aligned activities. Mandatory disclosures are applicable only to larger companies under the CSRD and financial institutions.
The EU Taxonomy initially impacted larger companies with 500 or more employees. However, with the implementation of the CSRD, the range of companies obligated to comply with the EU Taxonomy expanded.
How to implement the requirements of the EU Taxonomy?
Companies can ensure alignment with the EU Taxonomy by following four main steps:
- The first step is to identify the taxonomy-eligible activity. In this step, it is analysed which activities of the company are covered by the EU Taxonomy.
- The second step is the assessment of the taxonomy-aligned activity. Here it is checked whether the technical screening criteria are met.
- The third step is to check whether the company’s activities comply with the minimum safeguards.
- The fourth step is the implementation of disclosure obligations and reporting.
For a comprehensive understanding on navigating the EU Taxonomy Regulation, please refer to the implementation guideline.
The role of the EU Taxonomy on the global scene
Non-EU entities need to be aware of its impact, as the interconnected global financial markets extend its scope. EU financial market players, even operating outside the EU, are likely to seek EU Taxonomy-aligned data from non-EU entities for complete and transparent screening.
Additionally, non-EU investors and financial advisors offering products in Europe are subject to the Sustainable Finance Disclosure Regulation, requiring alignment with the EU Taxonomy. The EU Taxonomy serves as a reference for many countries’ green taxonomies, emphasizing its influence on a broader scale.
Conclusion
Interview with industry leader on navigating the EU policy landscape
In October, Publyon conducted an interview with Brenda Kramer and Maurits Heldring, Responsible Investment Experts for PGGM. In this interview, they shared their insights into the role of the EU Taxonomy for investment managers.
About Publyon
Publyon is a corporate affairs consultancy at the heart of the European Quarter in Brussels, specialised in the development and execution of effective Public Affairs and communication strategies. With sustainability at the heart of Publyon’s ambitions, we envision a fair, just and thriving world where people, organisations, communities and governments are aligned to unite and innovate for the benefit of all.
That is why we facilitate people and organisations to have their voices heard by policymakers and help them shape a better future with our analyses and insights into where society is heading.
For more information, reach out to us at eu@publyon.com or via the form below.
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