Navigating the EU Taxonomy Regulation
Introduction
The EU Taxonomy is a classification system for economic activities aimed at empowering investors and companies to make sustainable business decisions. A cornerstone of the EU’s efforts to reach the objectives of its Green Deal, it provides common language around what “sustainability” means in order to increase investment in sustainable projects.
Keep reading for a breakdown of what the EU Taxonomy and its Regulation seeks to achieve, who it applies to, and how businesses can prepare for compliance.
What the EU Taxonomy Regulation is aspiring to do
EU Taxonomy’s primary goal is to guide responsible investments by providing a clear framework for what economic activities can be labeled as environmentally sustainable. In streamlining the classification of these activities, the Taxonomy helps to prevent greenwashing through the promotion of transparency and accountability in sustainability claims.
In 2020, the EU Taxonomy Regulation came into force, establishing 4 conditions that an economic activity must meet in order to be considered “environmentally sustainable”. As outlined on the EU’s website, these conditions are:
Making a substantial contribution to at least one environmental objective;
Doing no significant harm to any of the other five environmental objectives;
Complying with minimum safeguards; and,
Complying with the technical screening criteria set out in the Taxonomy delegated acts.
By setting these standards, the EU Taxonomy Regulation aims to create a more sustainable economy by aligning financial flows with its 6 climate and environmental goals, pictured below.
Image Source: European Commission, Sustainable Finance Taxonomy.
What disclosures are required
The EU Taxonomy classification system is integrated into several broader regulatory frameworks, including the EU’s Non-Financial Reporting Directive (NFRD), which as of 2023 has been replaced by the Corporate Sustainability Reporting Directive (CSRD), and the Sustainable Finance Disclosure Regulation (SFDR). In brief, these frameworks require:
NFRD: Companies must disclose the percentage of their turnover, capital expenditures and operating expenditures that align with the Taxonomy’s sustainability criteria.
SFDR: Financial market participants, such as asset managers, are required to disclose the extent to which their financial products align with the Taxonomy’s sustainability framework.
These disclosures allow stakeholders to see how aligned a company's operations and investments are with environmental goals, making sustainability performance easier to track and compare.
Who does it apply to
While companies of any size can voluntarily align their operations with the EU Taxonomy, compliance is required for the following groups:
Companies already subject to the NFRD
Companies that now fall under scope of CSRD
Financial market participants, including asset managers, who offer and distribute financial products within the EU
Companies subject to the SFDR
Key dates to be aware of
Mandatory reporting under the EU Taxonomy began in 2022. However, the scope of compliance broadened with the introduction of CSRD. The following key dates reflect CSRD’s regulatory timeline, with companies having to include EU Taxonomy alignment in their reports. In addition, more detailed and stringent reporting requirements come into effect in 2024 including expanded data collection and increased transparency in accordance with updated EU Taxonomy delegated acts.
2025: Large companies already subject to NFRD transitioning into CSRD must issue their first alignment report
2026: Companies meeting 2 of 3: 250+ employees, €50m in turnover, €25m in total assets must issue their first alignment report
2027: Listed SMEs to issue their first alignment report, with allowance to delay compliance until 2028
What companies need to prepare
To prepare for compliance with the EU Taxonomy, companies should begin by:
Assessing their activities against the Taxonomy’s sustainability criteria
Gathering necessary data for disclosure, particularly on turnover, CapEx, and OpEx
Enhancing internal processes to ensure accurate and comprehensive reporting
Conducting a gap analysis to identify areas of improvement
Our recommendation
Even if your company is not directly subject to the EU Taxonomy’s reporting requirements, it’s important to recognize that the Taxonomy provides a robust set of standardization guidelines. These guidelines are likely to influence the broader industry and shape future regulatory frameworks. It’s important to stay informed about updates in reporting requirements and assessing how your company may be affected or expected to report.
Where Bespoke ESG can support
At Bespoke ESG, we help companies navigate the complexities of sustainability reporting, including EU Taxonomy alignment. Our team of experts can assist with:
Conducting in-depth assessments of your business activities against the Taxonomy’s criteria.
Providing education for your team on EU policies and how they affect your business.
Supporting data collection and the preparation of required disclosures.
Developing tailored strategies to enhance your sustainability reporting processes.
Disclaimer: The information provided in this document is for general informational purposes only and does not constitute legal advice. Regulatory advice is provided solely within the scope of contracts between Bespoke ESG and its clients.