The EU Taxonomy regulation (“the EU Taxonomy” or “Taxonomy”) was adopted in June 2020 as a common language that investors can utilize to recognize trustworthy, sustainable projects and activities that have a substantial positive impact on the environment, climate, and society. The Taxonomy has a critical role to play in facilitating sustainable investment to meet the goals of the European Green Deal, a growth strategy meant to help the EU become a climate-neutral continent by 2050, further the circular economy, cut air pollution, and restore biodiversity.
What is the purpose of the EU Taxonomy?
In December 2019, the European Commission adopted the European Green Deal, laying out the key actions needed for the EU to become a climate-neutral continent by 2050. To meet this objective, facilitating sustainable investment is critical. This is where the EU Taxonomy (“the Taxonomy”) steps in. The Taxonomy seeks to accelerate the financing of technologies and business activities that combat the climate and environmental challenges the EU faces by:
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Protecting investors from corporate greenwashing
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Scaling up investments in projects that accelerate the implementation of the European Green Deal
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Helping companies acquire finance for their green transitions
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Harmonizing the classification of green investment
How does the Taxonomy fit into the EU Policy Landscape?
From an EU regulatory perspective, the Taxonomy directly complements the EU’s Corporate Sustainability Reporting Directive (CSRD), you can read FSI’s deep dive into the regulation here. Companies in scope of the CSRD must report against the EU Taxonomy in the same management report as their material ESRS disclosures.
The EU Taxonomy also intersects with the EU’s Sustainable Finance Disclosure Regulation (SFDR). According to the Commission, Articles 5 & 6 of the Taxonomy requires all products falling under Article 8 and 9 of the SFDR to disclose their proportion of revenue, capital expenditure (CapEx), and operational expenditure (OpEx) aligned with the Taxonomy.
Lastly, the EU Taxonomy will expedite the development of EU-wide standards for environmentally sustainable financial products. An example of this would be the European Green Bond Standard, which uses the Taxonomy to establish green expenditure.
When does the EU Taxonomy come into effect and how do I know if I am in scope?
Financial and non-financial companies alike in scope of the EU’s Corporate Sustainability Reporting Directive (CSRD) must publish disclosures aligned with the Taxonomy’s requirements. The EU Taxonomy is currently in full force, with entities in scope of the NFRD already having disclosed their proportion of Taxonomy-eligible and Taxonomy-aligned turnover, CapEx, and OpEx for the first two environmental objectives, Climate Change Mitigation and Climate Change Adaptation. As of January 1, 2024, companies must now report this information to the remaining four environmental objectives of the EU Taxonomy. See below for the six environmental objectives of the EU Taxonomy:
Because of the complexity of the EU Taxonomy and CSRD, it may be worth undertaking reporting sooner rather than later, especially as limited assurance requirements for CSRD disclosures will come into effect for FY2025 data. We recommend getting ahead of these regulations by:
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First determining your entity’s level of compliance to the CSRD and EU Taxonomy
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If in-scope, conduct a gap analysis and assess the overlap of CSRD with other ESG reporting rules
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Elect a reporting approach that is cost-effective and simultaneously aligned with all ESG reporting requirements
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Either internally or through collaboration with external partners, bridge the gaps in data and report high-quality, audit-ready disclosures
Check back later this week on the second installment of this two-part piece on the EU Taxonomy, where we cover the reporting procedure when in-scope.
How does FSI help companies get ahead of Regulatory pressures?
Full Scope Insights is a full-service sustainability solutions partner supporting forward-thinking organizations in the development and execution of responsible business strategies. Our services include cost-effective approaches to ESG regulation gap analysis, double materiality assessment, Scope 1, 2, & 3 emissions inventory development, and assurance readiness assessment.
Lee Ballin, Partner & Head of ESG Advisory
Ethan Krohn, Sr. Associate – Sustainability & GHG Emissions