The EU Taxonomy and the CSRD: The EU-Taxonomy takes a central stage in the environmental disclosures of the ESRS
As sustainability becomes central to business strategy, the alignment between the EU Taxonomy and European Sustainability Reporting Standards (ESRS) is crucial in driving corporate transparency and responsible investment.
On August 30, 2024, the European Financial Reporting Advisory Group (EFRAG) unveiled the final digital taxonomy for ESRS, a major step forward in simplifying and standardizing sustainability disclosures across Europe. This development is a game-changer, making sustainability data not only accessible but also comparable through digital tagging, aiding regulators and investors in tracking corporate progress towards climate goals.
For companies, the EU Taxonomy serves as a compass, ensuring that their activities contribute to the EU’s environmental objectives while aligning with the stringent requirements of the ESRS and the Corporate Sustainability Reporting Directive (CSRD). The latest updates stress the need for consistency in how companies report on sustainability, focusing on financial materiality, transparency, and international alignment with standards such as the IFRS.
EU Taxonomy at the Core of Environmental Disclosures
The EU Taxonomy is now intricately linked to the CSRD through the ESRS E1 standard. Companies are mandated to unveil their economic transition plans, with alignment to the EU Taxonomy forming a cornerstone. This involves enterprises engaged in economic activities covered by delegated regulations on climate adaptation or mitigation, reporting on objectives or plans related to aligning their economic activities, such as revenues, capital expenditures (CapEx), and operational expenditures (OpEx).
Moreover, the ESRS emphasizes the disclosure of investments in sustainable activities. It requires companies to provide explanations and quantifications of investments and funding supporting their transition plans, referencing key performance indicators aligned with the taxonomy, notably in CapEx, and where applicable, CapEx plans.
Navigating the Requirements: Challenges and Solutions
Apart from reporting Environmental, Social, and Governance (ESG) data mandated by ESRS, companies face the additional task of outlining plans to align their economic activities with the EU Taxonomy. This poses a considerable challenge due to the novelty and complexity of the regulation.
10 fundamental errors in the implementation of the EU taxonomy
1. Ignoring the Context
Understanding the overall context and the legal framework is essential to avoid getting lost in technical implementation details and delaying efficient implementation.
2. Starting too late
The effort involved in implementing the EU Taxonomy is enormous, and data is often missing, or the data quality is insufficient. Starting too late harbors considerable risks and can cause additional costs. Good planning with a Your ESG Roadmap is essential.
3. Lack of integration into the corporate strategy
Anyone who treats the taxonomy as an isolated compliance project is missing the opportunity to create sustainable added value for the company. Embedding sustainability in the corporate strategy is an opportunity for the further development and growth of the company.
4. Lack of communication within the company
The EU taxonomy requires the involvement of various departments and employees within the company. Insufficient communication leads to misunderstandings and results in inefficient implementation. The involvement of all relevant stakeholders is crucial.
5. Underestimation of data requirements
The ESG in general requires detailed and accurate data. But the EU Taxonomy most of all. Underestimating the complexity and extent of data collection harbors the risk of incomplete or inaccurate reporting! Which can not only have regulatory consequences but also undermine investor confidence.
6. Avoidance of external support
The EU Taxonomy is complex and interpreting the criteria for the EU Taxonomy can be challenging. Companies that try without the right external advice run the risk of not being up to date on the regulations and overlooking or misinterpreting important aspects. The advice of real experts in the field like Klemens Marx can be crucial to fulfil the requirements correctly and in time and budget.
7. Unrealistic expectations of the IT systems
The implementation of the EU taxonomy often requires adjustments to existing IT systems for data collection and reporting. Companies that believe they can implement this without significant system adjustments risk delays and data inconsistencies. Relying on existing software like Excel has exactly that problem: multiple people working in an Excel spreadsheet can lead to confusion, disparity in data, and inefficient communication. Your EU Taxonomy Software is the crown jewel of Your ESG Software. Our team can improve your efficiency with streamlined onboarding and give the important answers you need. Ahead of time.
8. Rely on transitional solutions
Many companies rely on Interim Solutions to implement the EU taxonomy on an abrupt basis. Such transitional solutions are used to solve the problem in the short term and conceal a lack of preparation. However, they lead to problems as they cannot be sustainably integrated into the company's processes.
9. Lack of training and sensitization of employees
The EU taxonomy affects all levels of the organization but is often attempted to be implemented on the side. Other priorities or not enough time. Without appropriate training and sensitization measures, companies run the risk of employees not understanding the requirements or implementing them incorrectly and with huge time delays.
10. Underestimating the financial impact
Adapting to the EU taxonomy can require considerable investment in infrastructure, training, and system adjustments. Companies that underestimate the financial impact run the risk of getting into financial difficulties or delaying necessary and required investments. With Your ESG Solution you get an unmatched price-to-quality ratio by combining ESG consulting and software.
VIRIDAD offers a digital solution tailored to assist companies in this endeavor. We are amongst very few to actually have a software solution for the EU Taxonomy. The crown jewel of Your ESG Software. It offers much more efficiency and streamlines your process. Our platform facilitates a swift and efficient path to aligning with the EU Taxonomy and reporting the requisite taxonomy Key Performance Indicators (KPIs).
Our team has extensive experience and in-depth expertise in the areas of ESG: CSRD/ESRS, Double Materiality and EU Taxonomy and will guide you effectively to your compliance. We offer customized solutions that are tailored to the specific needs of your company. This symphony of software and consulting masters Double Materiality, CSRD, ESRS, and EU Taxonomy, with high efficiency and outstanding quality at low cost.
Conclusion
The integration of the EU Taxonomy into the CSRD's reporting framework underscores the growing emphasis on sustainable practices within businesses. While this presents challenges, technological solutions like VIRIDAD's platform aim to streamline compliance processes, ensuring companies can efficiently meet regulatory demands. For further information on how Viridad can support your compliance needs, reach out to us at contact@viridad.eu.
