The EU taxonomy explained
#CSRD • 12/05/2023 • Lien MorisCompanies subject to the European Reporting Requirement (NFRD or CSRD) must disclose how much of their turnover and expenditure is 'sustainable'. What is sustainable and what is not is defined in the EU taxonomy. That European sustainability bible launched in 2020 will enter into force in stages.
To meet the European Green Deal's climate targets, the European Commission wants to mobilize at least €1 trillion in sustainable investments over the next ten years. That funding must come partly from its own resources and partly from private sources. That is why Europe developed a system to make the sustainability of companies and investment products unambiguously visible and comparable. The linchpin of that system is the EU taxonomy.
If the EU wants to encourage sustainable investments, it must first be clear to everyone which economic activities are sustainable and which are not. That is the role of the EU taxonomy: to establish consistent, objective criteria for determining which economic activities qualify as sustainable. Moreover, this classification will create a common language for green investments.
Sustainable activities: which criteria?
To be included in the EU taxonomy, an economic activity must meet four requirements:
- Make a substantial contribution to at least one of the six environmental objectives
- Comply with the technical screening criteria for these environmental objectives (for now these are only made up for the 'climate mitigation' and 'climate adaptation' objectives)
- Do no significant harm to other environmental objectives - the Do No Significant Harm principle or DNSH
- Be in line with minimum social safeguards (human rights) - the Minimum Social Safeguards or MSS, such as the International Bill of Human Rights
3 types of sustainable activities
The taxonomy distinguishes three types of sustainable activities:
- Activities that have an inherently positive impact, e.g. by reducing or preventing greenhouse gas emissions.
- Activities that indirectly contribute to the climate transition, such as sorting waste to enable recycling.
- Transition activities, for which there is no technologically or economically feasible sustainable alternative, but which are the least harmful within their sector. That - otherwise controversial - transition category now includes gas power plants, nuclear power and biomass, albeit under strict conditions.
Roadmap for the EU taxonomy
- Defining suitable activities (eligibility)
The first step is for companies to indicate whether their activities are 'eligible'. In other words, does the sector qualify for the EU taxonomy? Currently, a catalogue is only available for the environmental objectives 'climate mitigation' and 'climate adaptation'. The catalogue, which currently covers more than 100 activities in various sectors, is structured by NACE codes.
If an economic activity does not appear in this catalogue, it does not qualify and is therefore not 'eligible'. For example, coal mining, fracking and the tobacco industry are examples of 'non-eligible' activities, which are not included in the taxonomy and therefore cannot be catalogued as sustainable under any circumstances.
2. The alignment check
If an activity is included in the catalogue, the next step is to check whether the activity is aligned with the EU taxonomy and can therefore be labelled as a sustainable activity. 'Aligned' means that an activity successively meets the technical screening criteria, the DNSH principle and the MSS criteria.
3. Calculate financial KPIs
Companies with activities that are aligned should calculate the following KPIs:
- what percentage of their revenue comes from products or services related to the sustainable activities in the taxonomy
- what percentage of their capital expenditure (CapEx) and operating expenditure (OpEx) is related to assets or processes related to the sustainable activities from the taxonomy
4. Reporting
You report the above KPIs in the sustainability report you are required to issue as a large company in accordance with the Corporate Sustainability Reporting Directive (CSRD). So there is a direct link between the CSRD, the reporting directive, and the EU taxonomy.
In a summary table, you indicate very precisely what percentage of your turnover, CapEx and OpEx is eligible/non eligible and aligned/non aligned. You also document the inputs, outputs and the process you followed to make the calculations.
You include all this information in the section of your report that deals with environmental issues.
Timing
The EU taxonomy will be introduced incrementally:
- Companies already currently covered by the NFRD will have to report in several steps:
- In the year 2022 (for the fiscal year 2021), these companies already had to report on elegibility for the climate targets climate mitigation and adaptation. For the other environmental targets, the timing is still being determined.
- In 2023 (fiscal year 2022), non-financial companies in this group will also have to report on their EU taxonomy alignment. Financial companies have to do so from 2024 (fiscal year 2023).
- Companies covered by the CSRD must report all KPIs from 2026 (fiscal year 2025).
- Listed SMEs get another year's delay: they have to report from 2027 (fiscal year 2026).
Example: anaerobic digestion
Suppose your business is linked to the activity anaerobic digestion (via your turnover or via an investment). To report on that correctly, look up that activity in the EU Taxonomy Compass:
- Find the activity via the search bar.
- Click on the activity.
- You get an overview of the technical criteria that must be met to contribute to two environmental objectives (climate mitigation and climate adaptation), the DNSH criteria and the MSS.
- It also describes any damage the activity may cause to other targets.
Are you getting lost in the EU taxonomy, the CSRD and other new obligations under the European Green Deal? We guide you step by step. Contact us at mail@pantarein.be.
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