The EU Taxonomy acts as a responsible investment facilitator by allowing investors to easily identify sustainable activities across companies and sectors. These activities are clearly defined by EU Taxonomy to help the EU meet the goals of the European Green Deal. For a comprehensive background on the EU Taxonomy, its purpose, and relationship with the EU regulatory landscape, check out part one of our FSI Factcheck series.
If a company is determined to be in scope of the CSRD, reporting against the EU Taxonomy is mandatory. In-scope companies are required to report their proportion of revenue, capital expenditure (CapEx), and operational expenditure (OpEx) that are Taxonomy-eligible and Taxonomy-aligned for each of the six environmental objectives:
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Climate change mitigation
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Climate change adaptation
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Sustainable use and protection of water and marine resources
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Transition to a circular economy
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Pollution prevention and control
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Protection of healthy ecosystems
What constitutes a Taxonomy-eligible/aligned activity?
Taxonomy-eligible activities: An economic activity qualifies as Taxonomy-eligible if it is considered an “enabling activity” or “transitional activity”, meaning that it helps contribute to at least one of the six environmental objectives above, or facilitates the energy transition.
Taxonomy-aligned activities: All Taxonomy-aligned activities are eligible, but not all eligible activities are aligned. To be Taxonomy-aligned rather than just Taxonomy-eligible, the activity must fulfill all the following:
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Comply with both the EU’s applicable technical screening criteria (TSC) by:
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Making a substantial contribution to one of the six environmental objectives
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Doing no significant harm (“DNSH”) to the remaining five environmental objectives.
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Comply with the minimum safeguards. These align with international human rights guidelines, such as the OECD, UNGP, and ILO.
If the economic activity being assessed does not fulfill requirements 1b and 2, the activity must then be reported as only Taxonomy-eligible, rather than fully Taxonomy-aligned. Therefore, the economic activity is sustainable, but certain aspects of the economic activity are not desirable for the EU in the long-term.
Where do Companies Report against the EU Taxonomy?
Companies in scope of the CSRD, according to ESRS 1 General Requirements, must present the EU Taxonomy together in an easily identifiable and accessible portion of the environmental section within the company’s sustainability statement.
The EU Taxonomy is a highly complex regulatory framework that will have positive, long-lasting impacts if a cautious, honest approach is utilized when reporting. We advise cooperating with your governance body, legal and finance department, and knowledgeable external advisors to assess the appropriate categorization of your revenue, CapEx, and OpEx against the EU Taxonomy’s sustainable activities.
Limited assurance of EU Taxonomy disclosures, and all other reported information will be required in your entity’s first year of reporting against the CSRD. Because of the intricacies of the CSRD including EU Taxonomy reporting, double materiality assessment, and disclosure of climate risks and goals, we recommend preparing well in advance to ensure high-quality data and internal processes are in place to successfully navigate stakeholder expectations and a limited assurance engagement.
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