EU Taxonomy compliance: how to prepare & key dates

July 2, 2024
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The EU Taxonomy establishes a classification system, or "taxonomy," that identifies environmentally sustainable economic activities.

It is the first unified and trustworthy framework that prompts economic agents to pursue low-carbon, resilient, and sustainable routes. This visibility is crucial for investors seeking sustainable investments and aids in combating greenwashing.

For businesses, it is a chance to demonstrate their progress and commitment to sustainability in a consistent and comparative way.

Overall, the Taxonomy is not intended to be a checklist practice; rather, it is meant to be a consistent procedure for determining and measuring against the new TSC and allocating turnover in the appropriate manner.

In this article, we highlight how your business can effectively align with the Taxonomy, ensuring that each step you take towards sustainability is strategic and delivers significant impact.

What is the EU Taxonomy: definition

The EU taxonomy forms the backbone of the EU’s sustainable finance strategy, acting as a vital tool for enhancing market transparency. Its primary role is to guide investments towards key economic activities necessary for the transition to sustainability, aligning with the goals of the European Green Deal. Essentially, this taxonomy is a detailed classification system that outlines criteria for economic activities that support a net-zero emissions pathway by 2050 - among other environmental objectives.

To meet the EU’s 2030 climate and energy targets and the broader goals of the European Green Deal, it is crucial to channel investments into sustainable projects and activities. Achieving this requires a shared language and a clear definition of ‘sustainable’ activities. This need led to the development of a standardised classification system for sustainable economic activities, referred to as the “EU taxonomy”, as part of the action plan on financing sustainable growth.

The EU taxonomy provides a common framework for both financial and non-financial entities to identify and define environmentally sustainable economic activities. This common understanding is essential for scaling up sustainable investments across the EU. It enhances investor confidence, protects against greenwashing, helps companies improve their environmental performance, and reduces market fragmentation. The Taxonomy Regulation, effective from July 12, 2020, establishes the EU taxonomy by setting four key conditions that economic activity must meet to be deemed environmentally sustainable.

The European Commission, under this regulation, was responsible for listing environmentally sustainable activities by setting technical screening criteria for each environmental goal through delegated and implementing acts.

A comprehensive approach to preparing for the EU Taxonomy

Assess eligibility and regulatory compliance

Begin by understanding your company's profile, including the number of workers, sector, and turnover. Determine whether compliance with EU regulations such as the EU Taxonomy, SFDR, and CSRD is necessary.

Identify eligible business activities

Map your economic activities to the EU Taxonomy to ascertain which are eligible for alignment. Understand the significant contributions and potential Do No Significant Harm (DNSH) implications.

Evaluate social safeguards compliance

Consider compliance with minimum social safeguards, ensuring adherence to international human and labour rights standards outlined in OECD guidelines, UN Guiding Principles on Business and Human Rights, and relevant labour rights conventions.

Compile mandatory disclosures report

Prepare a comprehensive report on mandatory disclosures, detailing the extent of alignment with the EU Taxonomy and other relevant regulatory requirements.

Seek external assurance

Pursue external assurance for your Taxonomy-related disclosures, following industry best practices and standards to enhance credibility and transparency.

It is also possible that additional internal controls will need to be created in order to report trustworthy Taxonomy-aligned disclosures - and that even more strategic considerations about the future-proofness of one's business model will emerge as a result of this.

The key importance of data collection

Moving forward, the formulation of an effective and unified strategy is contingent upon the establishment of a proper data structure. Data collection should be conducted per the Taxonomy to periodically ascertain the degree to which the business goals and objectives correspond with those of the EU Taxonomy.

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After analysing and understanding the gathered data, enterprises should determine whether their activities fall under the EU Taxonomy, and devise a tailored strategy according to their status:

Aligned activities

Businesses are advised to compute pertinent environmental metrics and figures to fulfil reporting requirements under the EU Taxonomy Regulation. Moreover, enterprises should engage in benchmarking exercises with industry peers to gain insights into their positioning within the broader business landscape. This step is crucial as the EU Taxonomy fosters increased transparency and comparability among peers. Investors will have access to each organisation's disclosures, underscoring the importance of assessing whether the organisation is leading or lagging in sustainability efforts.

In November 2023, the Commission tentatively approved a new set of EU Taxonomy criteria targeting economic activities that significantly contribute to various non-climate environmental objectives, including sustainable water and marine resource management, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.

Additionally, the Commission introduced targeted revisions to the EU Taxonomy Climate Delegated Act, expanding the scope to include economic activities related to climate change mitigation and adaptation, particularly within the manufacturing and transportation sectors. Encompassing a broader spectrum of economic activities across all six environmental objectives and, consequently, more economic sectors and companies, will enhance the usability and potential impact of the EU Taxonomy in promoting sustainable investments within the EU.

Non-financial enterprises are required to disclose the proportion of their revenue corresponding to taxonomy-aligned classifications. Furthermore, they should consider including additional key performance indicators (KPIs) such as capital expenditure (CapEx) and operational expenditure (OpEx) if deemed relevant.

Financial market participants must explain the extent to which they utilise the taxonomy to assess the sustainability of underlying investments. Additionally, they must specify the environmental objectives to which the investments contribute and disclose the percentage of taxonomy-aligned underlying investments relative to the total investment, fund, or portfolio.

Activities not included in the Taxonomy

Although there are activities which are not included in the taxonomy, they should meet the 'do no harm' requirement. It is important to remember that just because an activity is not included in the Taxonomy at the moment does not indicate it is unsustainable. Nonetheless, with the adoption of the Corporate Sustainability Reporting Directive (CSRD), businesses will be required to publish data on environmental performance that is not Taxonomy-aligned.

Therefore, industries or activities not presently covered by the EU Taxonomy due to their limited contribution to the six environmental objectives will still have the opportunity to report their environmental performance to financial market participants through the CSRD. Moreover, as delegated acts addressing the remaining four environmental goals are introduced, more businesses and activities will likely become eligible for inclusion in the Taxonomy.

Furthermore, there is potential for the EU to introduce a social Taxonomy, expanding the scope of the Taxonomy's applicability to include social considerations.

Activities that are not compliant

Enterprises must first identify activities requiring substantial adjustments to align with the principles outlined in the Taxonomy. Subsequently, they should develop a comprehensive long-term strategy for transforming these activities. In cases where fundamental reform proves unfeasible, one option is to devise a divestiture strategy.

Timeline

The EU Taxonomy significantly increased the requirements for major public-interest corporations to disclose sustainability information starting January 2022, while small and medium-sized enterprises (SMEs) are exempt from these new standards until 2026.

Published in the EU's Official Journal on June 22, 2020, the Taxonomy came into effect on July 12, 2020. To provide sufficient time for relevant stakeholders to familiarise themselves with the criteria for environmentally sustainable economic activities, the Regulation’s obligations became applicable 12 months after the adoption of the relevant technical screening criteria.

The Taxonomy Regulation is implemented in stages, with specific provisions taking effect on designated dates:

  • January 1, 2022: all in-scope firms must disclose the percentage of their income, capital expenditures, operating costs, Assets Under Management (AUM) for asset managers, or Green Asset Ratio (for banks and financial institutions) that are Taxonomy-eligible.
  • January 1, 2023: non-financial corporations must report the percentage of their primary KPIs (turnover, CapEx, and OpEx) that are Taxonomy-aligned.
  • January 1, 2024: financial businesses, including asset managers, banks, insurance, and pension providers, must declare the Taxonomy alignment of their underlying investments, but only for investee corporations that have self-reported starting from January 2023.

Companies will be required to disclose the amount spent, such as through capital expenditures, on enhancing Taxonomy-aligned operations or upgrading non-Taxonomy-aligned activities. Green income and expenditure disclosure will inform the market about:

  1. Firms adhering to EU Taxonomy standards through the disclosure of revenue shares from Taxonomy-aligned activities.
  2. Companies undertaking measures to achieve alignment, through the disclosure of green expenditures.

Key environmental objectives and deadlines

The EU Taxonomy evaluates sustainability based on six environmental objectives, each with distinct release and mandatory application dates:

  • Climate Change Mitigation: released in April 2021, mandatory from January 2022.
  • Climate Change Adaptation: released in April 2021, mandatory from January 2022.
  • Sustainable Use and Protection of Water and Marine Resources: released in December 2021, mandatory from January 2023.
  • Transition to a Circular Economy: released in December 2021, mandatory from January 2023.
  • Pollution Prevention and Control: released in December 2021, mandatory from January 2023.
  • Protection and Restoration of Biodiversity and Ecosystems: released in December 2021, mandatory from January 2023.

Additional regulatory milestones

Several key dates and actions supplement the primary objectives:

  • January 8, 2021: release of a study on the rating of sustainability.
  • February 24, 2021: enactment of the Green Deal.
  • April 2021: release of technical criteria for climate change mitigation and adaptation.
  • June 2021: adoption of guidelines for non-financial information disclosure under the EU Taxonomy.
  • December 2021: release of technical criteria for the remaining four environmental objectives.
  • January 2023: mandatory disclosure of the remaining four environmental objectives.
  • November 21, 2023: publication of a Delegated Act for economic activities contributing to various environmental objectives and amendments to expand the list of activities contributing to climate change mitigation and adaptation.

The Taxonomy may further evolve to include additional sectors and activities, enhancing its applicability and impact on sustainable investments within the EU.

Difference between eligibility and alignment

Eligibility of an activity signifies its inclusion in the delegated acts related to climate change mitigation or adaptation. However, whether an activity is Taxonomy-eligible does not determine its long-term sustainability. Eligibility indicates that the activity contributes significantly to one of the Taxonomy's six environmental objectives.

For an eligible activity to be considered taxonomy-aligned, it must meet all the specific standards listed in the Taxonomy. This means the activity must satisfy all technical screening requirements, adhere to the "do no significant harm" criteria, and comply with the minimum safeguards stipulated for that activity.

Apiday’s hassle-free EU Taxonomy compliance module

Navigating the complexities of the EU Taxonomy can be challenging, but Apiday’s comprehensive solution simplifies this critical process for investors and companies alike. Here’s how Apiday stands out:

Eligibility screening and alignment

Apiday's platform includes advanced screening tools that help you quickly determine whether your activities are eligible under the EU Taxonomy and ensure these activities align with the requirements of the EU regulations.

Guided workflows and simple assessments

Apiday offers detailed, step-by-step workflows that guide you through each stage of the compliance process. The platform asks straightforward, easy-to-understand questions that help you assess your activities’ substantial contribution, compliance with the “Do No Significant Harm” criteria, and adherence to minimum safeguards.

End-to-end solution

Our module is not just a tool—it’s a full-service solution that supports companies and investors through the entire process of EU Taxonomy compliance, from initial assessment to final reporting. Apiday's modules provide an all-encompassing, easy-to-use platform that ensures you are fully compliant with all major EU regulations, thereby enhancing your operational efficiency and sustainability reporting.

Take advantage of Apiday to stay ahead in the evolving landscape of sustainability!

EU Taxonomy compliance: how to prepare & key dates

Streamline your compliance journey with Apiday!

Our EU Taxonomy module takes the pain and guesswork away - from eligibility screening and aligning to outputting the required RTS reporting. Whether you are an investor or a company, Apiday’s EU Taxonomy feature delivers an end-to-end solution for you. Try it today!

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Frequently Asked Questions

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