The Essentials of EU Taxonomy for Companies

As the cornerstone of the European Union's ambitious Green Deal, the EU Taxonomy aims to standardise what qualifies as a sustainable economic activity, promoting transparency and consistency across the market. Ultimately, this framework is designed to guide businesses and investors towards sustainable and environmentally responsible activities.

Understanding the EU Taxonomy is thus crucial for any business looking to unlock considerable opportunities for businesses such as access to green financing, creating a competitive advantage, and improving brand reputation by contributing to the transition to a low-carbon economy.

This article serves as a comprehensive guide providing the essential information needed to navigate the complexities of the EU Taxonomy and leverage its benefits for a greener, more resilient business. Read this article to discover more about:

• What is EU Taxonomy?
• EU Taxonomy: Origin and Milestones
• Who is Subject to the EU Taxonomy?
• EU Taxonomy Timeline: A Progressively Expanding Scope
• How does the EU Taxonomy Work?
• Relationship between the EU Taxonomy, CSRD, and SFDR
• EU Taxonomy Benefits for Companies
• EU Taxonomy Challenges for Companies
• Greenomy: Your Ally for EU Taxonomy Reporting
  
  

Before getting started, feel free to download your free summary EU Taxonomy e-book to always have at hand everything you need to understand the EU Taxonomy.

Let’s dive in!

What is the EU Taxonomy? 

EU Taxonomy Definition

The EU Taxonomy is a classification system that defines whether an economic activity can be considered environmentally sustainable for non-financial and financial stakeholders to measure, calculate, and compare their sustainability performance. It provides science-based assessment criteria for determining sustainable alignment and creates a common language that can be used across sectors and industries.

EU Taxonomy Objectives

The EU Taxonomy intends to integrate Environmental, Social, and Governance (ESG) factors into broader business strategies, enabling organisations to define, achieve, and communicate measurable sustainability objectives. By providing insights into associated financial risks and fostering informed decision-making, the EU Taxonomy helps mitigate 'greenwashing'—where companies falsely claim to be more eco-friendly than they are. Overall, it serves as a foundational framework for elevating environmental sustainability as a core consideration in economic activities.

Additionally, the EU Taxonomy framework paves the way for investors and financial institutions to make informed green investment choices, understand financial and risk components, and perform comparative analyses using sustainability factors. 

As stated Quentin Hennaux, Sustainability Expert, in his interview about EU Taxonomy Reporting:

"Any company can say they are sustainable, but the EU Taxonomy intends to provide stakeholders with appropriate definitions for which activities can be considered environmentally sustainable thanks to science-based criteria."

EU Taxonomy: Origin and Milestones

The EU’s Action Plan for Sustainable Finance and the EU Green Deal’s Sustainable Finance policy initiatives call for a transition of capital flows towards sustainable investment, recognising sustainable finance as a vital avenue in achieving the goal of carbon neutrality by 2050 set by the 2016 Paris Agreement. 

The EU Taxonomy was developed through delegated acts over the years in several milestones.

Who is Subject to the EU Taxonomy?

As part of the same initiative to achieve the EU Green Deal objective, the EU Taxonomy aligns with the scope guidelines of the CSRD. Read this article for detailed information on the eligibility criteria and timeline for CSRD reporting.

The only exception is that all non-financial corporations that were in the scope of the EU Non-Financial Reporting Directive (NFRD) already had to comply with the EU Taxonomy for the first time in 2022, instead of 2025 for the CSRD. In other words, companies that were listed, had more than 500 employees and met at least one of these criteria:

• the balance sheet is above €25 million;
• the net turnover is above €50 million.

EU Taxonomy Timeline: A Progressively Expanding Scope

Due to the novelty of the EU Taxonomy and the fact that it is only one element of a broader reporting ensemble, the European Commission has decided to phase in its entry into force regarding both the reporting requirements and the companies that are in scope.

EU Taxonomy Implementation Timeline

• 2022: Simplified reports, including eligibility for the FY 2021
• 2023: Reports must include the alignment for the FY 2022
• 2024: Integration for the 4 new environmental objectives (eligibility only) for FY 2023
• 2025: Integration for the 4 new environmental objectives (eligibility and alignment only) for FY 2024
• 2026: Expansion of the companies in scope to include the large companies, for the FY 2025
• 2027: Expansion of the companies in scope to include  listed SMEs, for the FY 2026 with a two-year opt-out period are required to report on the FY 2026
• 2029: Expansion of the companies in scope to include the Non-EU companies with subsidiaries/branches in the EU, for the FY 2028 are mandated to report for the FY 2028

How does EU Taxonomy Reporting Work?

The EU Taxonomy reporting exercise starts by assessing the EU Taxonomy eligibility of the organisation’s activities. To do so, the easiest way is to understand the NACE code that applies to the core business and expenses, which can help to identify relevant activities within the EU Taxonomy framework, to determine the turnover, Capex & Opex associated with these activities and to compute the EU Taxonomy eligibility with these formulas.

The second step of reporting is assessing the EU Taxonomy alignment, which mainly consists of measuring and establishing whether the activities meet the Technical Screening Criteria (TSC) under the EU Taxonomy. 

An activity is aligned with the EU Taxonomy if

• It makes a substantial contribution to at least one of the six environmental objectives.
• At the same time, it does no significant harm (DNSH) to the remaining environmental objectives.
• It adheres to Minimum Safeguards (MS).
  
  

The 6 environmental objectives of the EU Taxonomy

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control 
6. Protection and restoration of biodiversity and ecosystems

After completing the alignment screening, the KPIs can be calculated. For each financial KPI (turnover, CapEx, and OpEx), the report needs to include the percentage of total turnover, CapEx, and OpEx linked to EU Taxonomy-eligible activities and the percentage linked to EU Taxonomy-aligned activities. The final output of the EU Taxonomy report is a score representing the extent to which an organisation's activities are aligned with EU sustainability criteria.

As to where to report, for non-financial companies, EU Taxonomy disclosures should be included in the non-financial statement required by the NFRD. This statement can be part of the annual report or a separate sustainability report, depending on the regulations of the Member State in which the company operates.

Relationship between the EU Taxonomy, CSRD, and SFDR

The EU sustainable finance framework encompasses the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), and the Sustainable Finance Disclosure Regulation (SFDR). These three regulations are closely interconnected, working together to direct investments toward activities aligned with the Taxonomy by enabling investors to identify these activities.

Regarding their interoperability, the EU Taxonomy establishes a classification system for sustainable economic activities, which is applied within both the CSRD and SFDR.

The CSRD mandates that companies include a distinct section for disclosures related to the EU Taxonomy. Additionally, investments aimed at enhancing alignment with the Taxonomy should be included in the transition plans outlined in the CSRD report. The pre-contractual and periodic disclosures required by the SFDR also reference the EU Taxonomy several times. Asset managers managing Article 8 or 9 funds should utilise either the EU Taxonomy scores of their investees or the Principal Adverse Impact (PAI) data available in the CSRD report to substantiate the sustainability strategies of their funds.

Learn more about the relationship between the CSRD, EU Taxonomy and SFDR in this article.

EU Taxonomy Benefits for Companies

Despite the resources necessary to generate the report, the EU Taxonomy presents clear benefits for organisations. This ESG standard serves as a value-driver for financial management, operational efficiency, positive stakeholder relations and strategic decision-making. Learn more about the strategic opportunities for businesses beyond compliance in our dedicated article.

EU Taxonomy Challenges for Companies

On the other hand, reaching compliance presents considerable challenges, especially in the first exercise.

• Complexity and training: This standard comprises extensive legal documents, spanning hundreds of pages. Even those familiar with ESG concepts may find it difficult to grasp and interpret the criteria to screen activities. Investing in proper training and expert consultancy can facilitate a smoother start.
• Data collection & management: Handling large volumes of data from various sources and formats is one of the biggest challenges of generating the first EU Taxonomy report. Implementing robust data management systems and processes is essential to meet this legal requirement.
• Cost of compliance: Initial compliance with the EU Taxonomy, like any ESG standard, can require substantial financial investment, especially for companies with limited resources. Best practices to address this include starting well in advance to explore the best options and leveraging cost-reducing ESG reporting software and time-saving external consultants.
• Regulatory changes and updates: The regulatory landscape is continuously evolving, making it challenging to stay updated with changes to the EU Taxonomy. Establishing a dedicated team to monitor regulatory updates or utilising an ESG reporting solution which is continuously updated to reflect the latest developments, such as Greenomy, are effective solutions.

Greenomy: Your Ally for EU Taxonomy Reporting

While the EU Taxonomy requirement offers significant benefits for compliant companies, it also presents its own set of challenges. Greenomy is specifically designed to help companies overcome these challenges by providing support at every step of the reporting journey. 

Our end-to-end solution offers comprehensive training for internal teams to achieve reporting autonomy, streamlines data collection and management through seamless integrations and an extensive ESG data library, resulting in cost reductions. Book a call for further details.