EU TAXONOMY CHRONICLES
Investors are more and more sensitive to sustainability and related standard reports that enable to easily compare companies’ activities and choose those that have a positive impact from both environmental and social standpoints. This is one of the main objectives of the European Taxonomy regulation, that is part of a broader set of policies belonging to the European Green Deal.
What is the EU Green Deal context?
In December 2019, the European Commission presented the European Green Deal, an overarching framework and program of actions to guide the EU toward climate neutrality in 2050. As part of the European Green Deal, the EU adopted an ambitious package of measures. This package includes:
- The Corporate Sustainability Reporting Directive (CSRD), that aims to revise and strengthen the existing rules introduced by the Non-Financial Reporting Directive (NFRD) and to bring sustainability reporting on a par with financial reporting.
- The Sustainable Financial Disclosure Regulation (SFDR), that aims to ensure that financial market actors can finance growth sustainably, in the long term.
- The European Taxonomy, that is expected to shift investments toward a low-carbon and climate resilient economy.
The EU Taxonomy applies to both financial and non-financial actors as of 2022 and it added a layer of complexity in their reporting scenario that will be further structured by the CSRD regulation.
What is the European Taxonomy?
The European Taxonomy is a classification system that establishes a list of environmentally sustainable economic activities and provides companies, investors, and policy makers with definitions on what is green and the related screening criteria.
This regulation establishes six environmental objectives to pursue through the activities listed in it: (1) climate change mitigation; (2) climate change adaptation; (3) sustainable use and protection of water and marine resources; (4) transition to a circular economy, water prevention and recycling; (5) pollution prevention and control; and (6) protection of healthy ecosystem.
In 2022, companies will need to focus and report on activities related to the first two objectives:
- Climate Change mitigation – the process of holding the average global temperature increase from pre-industrial levels to well below 2 degrees, with an ambition of keeping it to 1.5 degrees, as set out in the Paris Agreement.
- Climate Change adaptation – taking action to prepare for and adjust to both the current effects of climate change the predicted impacts in the future.
The four other environmental objectives will be analyzed starting from 2023.
What is the impact of the EU Taxonomy on companies?
Since November 2020, companies started exploring this regulation to better understand what exactly was expected from them by reading the EU Taxonomy agreement as well as its Article 8, its delegated acts and Annex 1 & Annex 2.
By benchmarking on this topic inside our Sustainable Business Community, a unique benchmarking community organized by TOLSON that brings together CSR directors from multinational companies, we understood that:
- Setting a multidisciplinary team is key – the EU taxonomy is probably the most complex financial reorientation project ever created and it requires the expertise of different Departments such as Finance, Sustainability and Accounting.
- Some sectors are not represented by the activities listed – this makes it difficult for companies to report and show involvement in sustainable environmentally activities. On the technical side, the climate delegated acts are supposed to evolve as well as all other delegated acts, through the insertion of new activities.
- The EU Taxonomy is a piece of a larger reporting puzzle that companies are deploying – firms are already considering this report as part of a larger reporting exercise that will be finalized through the CSRD implementation.
A Debate on including Nuclear and Fossil energy is ongoing – On December 31st, 2021, the EU Commission began consultations on a draft text of a Taxonomy Complementary Delegated Act (CDA) covering certain gas and nuclear activities. This draft document mentioned three nuclear energy activities and three fossil gas activities listed as transitional. This document was subject to consultation period and has been now adopted by the European Commission. You can find it here.
Stay tuned for the second episode of our EU Taxonomy Chronicles series!