THE GREEN DEAL
Climate change and environmental degradation are considered major threats of our time. By decoupling economic growth from resource use and ensuring zero net emissions of GHG by 2050, the Green Deal aims to facilitate the transition to a resource-efficient, climate-resilient, and competitive economy in the EU. To achieve this, more capital needs to flow into sustainable activities. In pursuit of the objectives outlined in the Green Deal, the EU Taxonomy has been established as a framework to identify environmentally sustainable activities. To support sustainable investments the EU Taxonomy has been established serving as the framework to identify environmentally sustainable activities.
The EU Taxonomy
The EU Taxonomy Regulation (EU) 2020/852 plays a central role in the EU's sustainability strategy as it defines when an economic activity – and subsequently an investment – is considered sustainable. This common language enables investors to compare companies in terms of their sustainability performance (i.e., it helps them identify "green" activities) and redirect their funds towards environmentally sustainable companies. The EU Taxonomy is designed to be dynamic and is expected to evolve over time to reflect advances in scientific understanding and changes in environmental performance standards.
Who is when affected?
All companies in the scope of the Non-Financial Reporting Directive (NFRD), financial market participants or issuers in respect of financial products or corporate bonds that are made available as environmentally sustainable and financial market participants that make available financial products are required to report on non-financial information as per the EU Taxonomy. The NFRD applies to public interest entities with more than 500 employees. With the adoption of the Corporate Sustainability Reporting Directive (CSRD) in December 2022, a broader set of large companies, as well as listed small and medium-sized companies, will incrementally be affected and will hence have to report on sustainability matters.
For the reporting according to the CSRD and the EU Taxonomy are the following deadlines envisaged:
- Reporting period 2022: Companies that are already required to report under the NFRD (firstreport published in 2023).
- Reporting period 2025: All other large companies that meet at least two of the following three criteria (1st report to be published in 2026):
- > 250 employees;
- > EUR 25 million balance sheet total;
- > EUR 50 million net turnover.
- Reporting Period 2026: All small and medium-sized listed companies that meet at least two of the following three criteria (1st report to be published in 2027 with an opt-out until 2028):
- > 10 employees;
- > EUR 0.45 mil. balance sheet total;
- > EUR 0.90 mil. net turnover.
- Reporting Period 2028: All non-European companies with a consolidated turnover in the EU exceeding EUR 150 mil. and an EU subsidiary with a net turnover of more than EUR 40 mil.
THE EU TAXONOMY IN DETAIL
Requirements for environmental sustainability?
According to the EU Taxonomy, an economic activity is considered environmentally sustainable if it:
- Makes a substantial contribution to one or more environmental objectives,
- Does not cause significant harm to any of the other environmental objectives ("Do no significant harm / DNSH"),
- Complies with minimum social safeguards, and
- Meets the technical screening criteria.
Environmental objectives?
The EU Taxonomy describes six underlying environmental objectives as the basis for environmental sustainability. These environmental objectives have been successively adopted through delegated acts and include technical assessment criteria on the following topics:
- Climate change mitigation,
- Climate change adaptation,
- Sustainable use and protection of water and marine resources,
- Transition to a circular economy,
- Pollution prevention and control, and
- Protection and restoration of biodiversity and ecosystems.
Substantial contribution?
- Substantial contribution to "Climate change mitigation": The economic activity must significantly contribute to stabilizing greenhouse gas concentrations in the atmosphere by avoiding or reducing greenhouse gas emissions in line with the Paris Agreement's "1.5-degree target" or by enhancing greenhouse gas storage.
- Substantial contribution to "Climate change adaptation": This includes adaptation solutions that either substantially reduce the risk of the adverse impact of the current climate and the expected future climate on that economic activity or substantially reduce that adverse impact, without increasing the risk of an adverse impact on people, nature or assets.
- Substantial contribution to "Sustainable use and protection of water and marine resources": The economic activity contributes to achieving good status of waters or preventing the deterioration of water quality.
- Substantial contribution to "Transition to a circular economy": The economic activity significantly contributes to the transition to a circular economy, including waste prevention, reuse, and recycling.
- Substantial contribution to "Pollution prevention and reduction": The economic activity significantly contributes to protecting against pollution by reducing or preventing emissions, improving air, water, or soil quality, avoiding adverse effects on human health or the environment from chemicals, or eliminating pollutants and waste.
- Substantial contribution to "Protection and restoration of biodiversity and ecosystems": The economic activity contributes to the protection, preservation, or restoration of biodiversity or the achievement of a good state of ecosystems or the protection of ecosystems.
2022
To overcome the comprehensive threats of climate change and environmental degradation, Europe has adopted the Green Deal as a new strategy to promote growth while reducing greenhouse gas emissions and protecting the environment. As part of the effort to make the EU's economy sustainable, a new regulatory framework has been set up to help the financial market adjust to these challenges, and to direct capital flows towards sustainable activities.
2023
To overcome the comprehensive threats of climate change and environmental degradation, Europe has adopted the Green Deal as a new strategy to promote growth while reducing greenhouse gas emissions and protecting the environment. As part of the effort to make the EU's economy sustainable, a new regulatory framework has been set up to help the financial market adjust to these challenges, and to direct capital flows towards sustainable activities.
2024
To overcome the comprehensive threats of climate change and environmental degradation, Europe has adopted the Green Deal as a new strategy to promote growth while reducing greenhouse gas emissions and protecting the environment. As part of the effort to make the EU's economy sustainable, a new regulatory framework has been set up to help the financial market adjust to these challenges, and to direct capital flows towards sustainable activities.
2025
To overcome the comprehensive threats of climate change and environmental degradation, Europe has adopted the Green Deal as a new strategy to promote growth while reducing greenhouse gas emissions and protecting the environment. As part of the effort to make the EU's economy sustainable, a new regulatory framework has been set up to help the financial market adjust to these challenges, and to direct capital flows towards sustainable activities.
2026/2027
To overcome the comprehensive threats of climate change and environmental degradation, Europe has adopted the Green Deal as a new strategy to promote growth while reducing greenhouse gas emissions and protecting the environment. As part of the effort to make the EU's economy sustainable, a new regulatory framework has been set up to help the financial market adjust to these challenges, and to direct capital flows towards sustainable activities.
Taxonomy-eligibility vs. -alignment?
An economic activity is considered taxonomy-eligible if it is described in the delegated acts for the EU Taxonomy's environmental objectives. This means that the economic activity can potentially make a substantial contribution to an environmental objective.
An economic activity is considered taxonomy-aligned if it is taxonomy-eligible and meets the technical screening criteria for substantial contribution to at least one environmental objective as well as the "DNSH", and the associated Minimum Safeguards. After fulfilling all these requirements an economic activity is considered taxonomy-aligned and simultaneously, environmentally sustainable.
Technical Screening within the EU Taxonomy?
The technical screening criteria are scientifically founded, very technical and comprehensive criteria that must be met for an economic activity to achieve EU Taxonomy alignment. These criteria, which are listed in the delegated acts of the EU Taxonomy, aim to help companies make a significant positive impact on the environment or reduce their negative impact on the environment.
Do No Significant Harm (DNSH)?
For an economic activity to be considered environmentally sustainable, it must not significantly harm any environmental objective. The DNSH requirements establish the fundamental criteria for environmental sustainability, serving as the minimum standard that must never be compromised. Whether significant harm has occurred is determined by predefined threshold values.
The Minimum Safeguards?
To achieve EU Taxonomy alignment, an economic activity must also comply with specific social requirements and agreements. These comprise the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights, including core labor standards of the International Labor Organization (ILO) and the International Bill of Human Rights.
THE DIFFERENT REPORTING REQUIREMENTS
Reporting under the EU Taxonomy includes the disclosure of information on taxonomy eligibility and taxonomy alignment and its assessment using the reporting tables and qualitative information provided by the EU Taxonomy. Key performance indicators (KPIs) based on these assessments must be reported including:
- Turnover: The proportion of turnover from goods or services associated with environmentally sustainable economic activities.
- CapEx: The proportion of capital expenditure (CapEx) related to assets or processes associated with environmentally sustainable economic activities.
- OpEx: The proportion of operating expenditure (OpEx) related to assets or processes associated with environmentally sustainable economic activities.
Turnover KPI?
The Revenue KPI, as per the EU Taxonomy Regulation, is calculated as the proportion of the net turnover from goods or services associated with taxonomy-aligned activities (numerator) divided by the net revenue (denominator).
CapEx KPI?
The CapEx KPI is calculated as the proportion of capital expenditure associated with taxonomy-aligned activities (numerator) divided by the capital expenditure as defined in the EU Taxonomy (denominator). The numerator equals to the part of the capital expenditure included in the denominator that:
- Relates to assets or processes associated with taxonomy-aligned economic activities, or
- Is part of a plan to expand taxonomy-aligned economic activities or convert taxonomy-eligible economic activities into taxonomy-aligned economic activities ("CapEx Plan"), or
- Relates to the purchase of output from taxonomy-aligned economic activities and individual measures enabling the target activities to become low-carbon or to lead to GHG reductions, provided that these measures are implemented and operational within 18 months.
The CapEx Plan is an instrument to improve the sustainability performance that meets the following conditions:
The CapEx Plan is an instrument to improve the sustainability performance that meets the following conditions:
- Aims to increase the company's taxonomy-alignment, or
- Aims to upgrade taxonomy-eligible activities to render them taxonomy-aligned with a period of five years, and
- The plan is disclosed at the aggregated level of economic activities and approved by the management.
OpEx KPI?
The OpEx KPI is calculated as the proportion of operating expenditures associated with taxonomy-aligned activities (numerator) divided by operating expenditures as defined in the EU Taxonomy (denominator). The numerator equals to the part of the denominator's operating expenditures that:
- Relates to assets or processes associated with taxonomy-aligned economic activities, including training and other human resources adaptation needs, as well as direct non-capitalized costs that represent research and development;
- Is part of a plan to expand taxonomy-aligned economic activities or convert taxonomy-eligible economic activities into taxonomy-aligned economic activities ("CapEx Plan"), or
- Relates to the purchase of output from taxonomy-aligned economic activities and individual measures enabling the target activities to become low-carbon or to lead to GHG reductions, provided that these measures are implemented and operational within 18 months.
REPORTING FOR THE 1st TIME
The process of obtaining the required information for reporting can be complex and time-consuming due to the large amount of data and the high level of detail required for the key performance indicators (KPIs). With that in mind, it is highly recommended to get a good understanding of the requirements as early as possible, even if the company is not yet subject to the EU Taxonomy or CSRD. It may also be a good idea to use a specialized software such as VIRIDAD's EU Taxonomy Solution, as it can significantly streamline the process for all involved parties.
Establishment of a report requires four fundamental steps described in the following.
Step 1: Eligibility Check
In the first step, companies need to determine which of their economic activities are covered by the EU Taxonomy and described in the delegated acts, respectively (and are thus taxonomy-eligible). To facilitate the mapping of a company’s economic activities to the activities covered in the delegated acts, NACE codes have been added to the activities. It is worth noting, however, that the actual coverage of the activity in the delegated acts is decisive for determining the eligibility of that activity.
Step 2: Alignment Assessment
After economic activities have been linked to the activities covered in the delegated acts, it must be checked whether they meet:
- the relevant criteria for making a substantial contribution to an environmental objective,
- the "Do No Significant Harm (DNSH)" criteria, and
- the Minimum Safeguards. An economic activity is only taxonomy-aligned if these three-levels yields a positive result.
The alignment assessment requires collection of a significant amount of sustainability related data and information. Proper documentation, along the technical requirements in screening, is essential for regulatory compliance and achieving auditable results.
Step 3: Calculation of KPIs
In the next step, the key performance indicators (KPIs) are calculated in line with the EU Taxonomy requirements. This includes the collection of the taxonomy-eligibility and the taxonomy-alignment as well as financial data and proper aggregation. Reporting tables in accordance with the Regulation must be created and breakdowns calculated.
Step 4: Reporting
The key performance indicators for turnover, CapEx, and OpEx make up the core of the reporting and must be published in a predefined tabular format. This table lists the respective environmental objective to which the economic activity contributes and shows the activity’s compliance with the DNSH as well as the Minimum Safeguard criteria. Transitional and enabling activities are marked as such and their respective share of the turnover is provided. Aside from taxonomy-aligned activities, taxonomy-eligible activities must also be reported in the table.
In addition to this quantitative information, the regulation also requires the provision of qualitative information. This particularly includes an explanation of the used accounting method and of how turnover, CapEx, and OpEx were calculated (a referral to the relevant items of the financial statements needs to be made as well). Furthermore, the process of how EU Taxonomy alignment was determined must be explained, and how double-counting in the KPIs of turnover, CapEx and OpEx was avoided.
BENEFITS OF GOOD EU TAXONOMY KPIs
The effort for gathering all the necessary data for non-financial reporting should not be underestimated. In fact, it can a very time-consuming and lengthy process as it requires the involvement of several internal departments as well as external stakeholders. Hence, there may be companies which see this process as bureaucratic and cumbersome. However, it should be noted that high levels of EU Taxonomy alignment may lead to reputational advantages, as well as favorable financing conditions and better access to public funding programs. To take advantage of these benefits, it is therefore highly recommended to report in line with the regulation as early as possible, even if not yet required.