The recently introduced EU taxonomy already requires large public companies with more than 500 employees to publish how their operations meet the taxonomy’s sustainability standards. The requirements and framework are constantly expanding and are likely to become even more important in the near future for large enterprises subject to the new CSRD. So in our article, you can find out who is primarily affected by the new regulation, what the new set of rules entails, and how to prepare for the EU taxonomy using the EU taxonomy reporting software.
What exactly is sustainable?
This is a complex topic, and in short, sustainability is necessary for building a sustainable economy and achieving the EU Commission’s goal of making Europe the first emission-neutral continent by 2050. The EU Commission has created a framework for assessment using a taxonomy that allows for a transparent assessment of the sustainability of each company. Companies will now have to openly provide information about their economic activities, which will facilitate rapid changes in the economy.
Content of the EU taxonomy
The EU Taxonomy, (EU) 2020/852, uses objective criteria to assess the sustainability of economic activities. These criteria were developed through technical expert consultations. Six environmental targets were agreed upon during the process:
- Climate protection,
- Adaptation to climate change,
- sustainable use and protection of water and marine resources,
- Transition to a circular economy,
- Prevention and control of pollution,
- Protection and restoration of biodiversity and ecosystems.
To be deemed sustainable, economic activity must contribute considerably to certain climatic and environmental goals while not negatively impacting other goals. Furthermore, minimal social norms must be followed.
The particular requirements were outlined in legislation delegated to the EU taxonomy. The Delegated Acts transform the taxonomy into a malleable piece of law that may evolve and become increasingly restricted based on the objective criteria stated in the Delegated Acts. This is the only method to fulfilling climate targets while also allowing the economy to adjust to those goals on an ongoing basis.
What areas of activity are subject to regulation?
The Regulation on Taxonomy and Delegated Acts do not apply to all forms of economic activity. This is explained by the fact that economic activities that can most contribute to the attainment of relevant environmental goals are given precedence. The first Delegated Act focuses on climate objectives (adaptation to and mitigation of climate change) and hence covers actions that are critical to lowering greenhouse gas emissions and building climate resilience.
This is not to say that the EU taxonomy is meaningless for businesses that do not operate in the industries covered. These businesses may utilize the taxonomy to assure the long-term viability of their purchases and profit from simpler financing of taxonomy-compliant investments.
Which companies must report according to the criteria of the EU taxonomy?
Currently, the EU Taxonomy primarily affects large companies with more than 500 employees. Such companies must report on the extent to which their activities fall under the framework established by the taxonomy. The so-called Non-Financial Reporting Directive defines which organizations must report and how (the EU taxonomy reporting software from Celsia.io will probably come in handy). The Directive is currently being amended and when finalized will be known as the Corporate Sustainability Reporting Directive (CSRD).
When the Directive enters into force, the reporting obligations will gradually extend to all large companies, not just those with public assets, and then to all listed companies of all sizes. However, it is possible to use the taxonomy for the promotion of your company. Because it will be a great demonstration to investors and stakeholders in general, how much the company is trending towards sustainable development according to the taxonomy.
But banks are already subject to reporting requirements and must publish information about their investment activities. And of course, this will have an indirect effect on all enterprises financed by banks. Therefore, in order to have good reporting, banks will gradually demand from the companies they finance an increasing involvement in the culture of sustainable development.
Taxonomy in practical application
So as you can see the implementation of the taxonomy is aimed at the participants of the financial market. In general, the taxonomy gives every financial market participant confidence that they are truly investing in sustainable economic activity. The taxonomy effectively prevents providers of financial products in Europe from “greenwashing”, i.e. promoting financial products as sustainable that do not meet the commonly accepted understanding of sustainability.
The taxonomy has an immediate impact on enterprises in the real sector that are already required to provide non-financial information. These firms will be subject to additional information disclosure responsibilities for the fiscal year 2021 beginning in 2022. They must report taxonomy compliance in connection to operational KPIs like sales and, if relevant, capital spending. This will make it easier for investors to compare sustainable efforts.
The taxonomy’s future consequences are still difficult to determine in certain circumstances and will be modified by political issues and commercial pressures throughout the process. It is important to consider the following consequences:
As previously stated, the taxonomy’s influence mechanism is primarily aimed at the financing conditions of entrepreneurship: if a company consistently demonstrates that a certain portion of its sales or investments corresponds to the taxonomy, this should be perceived by financial entities seeking to achieve specific sustainability goals and lead to increased investments in the relevant company. Stable businesses can thus profit from more advantageous financing alternatives and a greater variety of financing sources.
In general, organizations that act in accordance with the taxonomy may have a higher reputation and so obtain a competitive advantage.