To achieve the EU's climate and energy targets for 2030 and fulfil the goals of the European Green Deal, it is essential to direct investments into sustainable projects and activities. One of the regulations implemented to help accelerate this is the EU Taxonomy.
The EU Taxonomy is a classification system to determine whether an economic activity can be considered as environmentally sustainable. By defining whether a business’s activities are environmentally sustainable, it aims to direct investments towards sustainable projects and activities, and to navigate the transition to a low-carbon, resilient and resource-efficient economy. Additionally, it aims to provide certainty for investors and prevent greenwashing. For companies reporting under the EU Taxonomy, it can create a competitive advantage and increased reputation, and as a result, attract higher investments.
The EU Taxonomy focuses on economic activities that are aligned with one of the following six environmental objectives:
The EU Taxonomy applies to companies meeting the following criteria:
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EU companies in-scope of the Non-Financial Reporting Directive (NFRD) |
Periods beginning on or after 1 January 2021 |
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EU companies in-scope of the Sustainable Finance Disclosure Regulation (SFDR) with financial products that are classified as Article 8 and 9 |
Periods beginning on or after 1 January 2023 |
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NEW: EU companies in-scope of the Corporate Sustainability Reporting Directive (CSRD)* |
Periods beginning on or after 1 January 2025 |
* Companies in scope of CSRD in 2024 are likely already caught by the regulations by virtue of being in scope of the NFRD.
The European Commission has confirmed that where UK parent undertakings are subject to group-wide Corporate Sustainability Reporting Directive (CSRD) reporting (under Article 40a of the Accounting Directive), the group sustainability report is not required to report on the EU Taxonomy (Article 8, which sets out the EU Taxonomy disclosure requirements for companies).
To exempt EU subsidiaries (that are required to report under Articles 19a/29a, Accounting Directive) of a UK parent from sustainability reporting requirements, they must include EU Taxonomy disclosures covering their activities in their own management report or in the consolidated sustainability reporting of their UK parent. UK groups must consider the pros and cons of these options and choose at which level to report.
Unsure whether you’re in-scope of the CSRD? Read the scope requirements of the regulation here:
The EU Taxonomy established four criteria for determining whether an economic activity can be considered as environmentally sustainable.
An economic activity meeting all these criteria is defined as an activity that is aligned with the EU Taxonomy and therefore considered as environmentally sustainable.
Although compliance with the Minimum Social Safeguards is often viewed as the third criterion to fulfil, we recommend prioritising this as one of your initial steps, as it is a requirement at the company level. Failure to meet this criterion will prevent alignment with any activities. The other two criteria apply at the activity level and require complex research for each activity.
Non-financial undertakings that are required to report in line with the EU Taxonomy must disclose the proportion (%) of their turnover, capital expenditure (CapEx) and operating expenditure (OpEx) which are eligible and aligned with the taxonomy.
Example of the KPIs non-financial undertaking will need to report:
|
Economic activities |
Turnover |
CapEx |
OpEx |
|
EU Taxonomy eligible |
13% |
7% |
0% |
|
EU Taxonomy non-eligible |
87% |
93% |
100% |
|
EU Taxonomy aligned |
0% |
2% |
N/A |
|
EU Taxonomy non-aligned |
100% |
92% |
N/A |
Financial undertakings, such as asset managers and credit institutions, must report different key performance indicators (KPIs) than non-financial undertakings. These differ per type of financial undertaking and include KPIs such as the green share of investments and the Green Asset Ratio (GAR).
The EU Taxonomy is closely related to the following two regulations.
The CSRD requires companies to report on their sustainability-related impacts, risks and opportunities in accordance with the European Sustainability Reporting Standards (ESRS). Companies in scope must report on their sustainability performance against the EU Taxonomy. In addition, there is reference to the EU Taxonomy throughout the ESRS.
The EU Taxonomy disclosure should be integrated into the mandatory sustainability statement for the CSRD, and the reporting timeline is also consistent with the CSRD requirements. As the disclosure is integrated into the sustainability statement, it is subject to mandatory assurance.
The SFDR is an EU regulation that mandates financial market participants to disclose environmental, social and governance (ESG) information. There are three fund categories:
Under the SFDR, financial market participants must publish taxonomy-based metrics and disclosures for financial products that are classified as Article 8 and 9.
In 2020, the UK Government announced plans to deliver a UK Green Taxonomy. Similar to the EU Taxonomy, this will be a tool to provide investors with clear definitions of economic activities that qualify as 'green'. It will be tailored to the UK market although the exact differences with the EU Taxonomy are still unclear. The Government said it will collaborate with international partners to optimise interoperability and harmonisation to reduce reporting complexities.
The Sustainability Disclosure Requirement Implementation Update 2024, published by the UK Government in May earlier this year, shared that the Government is actively progressing with the development of the UK Green Taxonomy. It anticipates conducting a consultation on its proposed framework and specific activity level criteria which defines green activities. Following this, there will be a trial period for voluntary disclosures and usage for a minimum of two reporting years before considering mandatory disclosures.
The decision to make disclosures mandatory will depend on further consultation and evidence from the initial voluntary reporting phase to ensure that it provides valuable and dependable information for the markets.
Building a team is crucial for navigating the EU Taxonomy effectively. Involving colleagues from multiple departments is essential, as the taxonomy covers various business activities and the technical screening criteria for the activities can be detailed. Including the financial department is important for calculating the financial KPIs of the eligible and aligned business activities.
If you’re in scope of the CSRD, decide on your reporting level. This is important as it will determine if you have to report under the EU Taxonomy and on which level (eg, entity or consolidated level).
This can be done in two ways:
Additional research, such as looking at aligned or eligible activities reported by peers, will help to ensure no activities are missing. We also recommend considering the specific activities described in the EU Taxonomy, rather than focusing solely on the sectors covered. Even if your sector is not currently included in the EU Taxonomy, certain business activities unrelated to a specific sector, such as property ownership and solar energy generation, may still qualify for EU Taxonomy eligibility.
Assess whether your business complies with the Minimum Social Safeguards as laid out in the EU Taxonomy. As this is a company-level requirement, no business activities can be aligned without this criterion being met.
For eligible activities, check whether they contribute to at least one of the six environmental objectives and don’t cause significant harm to the other objectives based on the technical screening criteria set out in the EU Taxonomy.
For non-financial undertakings, this will include the proportion of revenue, CapEx and OpEx associated with each taxonomy-eligible and aligned economic activity.
Follow the reporting templates provided in the Annexes of the Commission Delegated Regulation (EU) 2021/21782. These templates help standardise the reporting process and ensure compliance. Integrate the taxonomy metrics and information into your annual financial reports, specifically within the non-financial statement section. If your company publishes a separate sustainability report, it's better practice to include the taxonomy disclosures there as well.
The EU Taxonomy is a work in progress with more sustainable activities added over time, making it essential to stay up to date with any changes.
For further insight and guidance on your sustainability reporting, get in touch with Lilly Walstra or Laura Gardner.
