The EU Taxonomy is a pivotal regulation designed to advance the European Green Deal sustainability goals. The EU Taxonomy’s scoping is broadly consistent with the Corporate Sustainability Reporting Directive (CSRD) (i.e., if a company is required to comply with CSRD, they will be required to comply with EU Taxonomy, although the EU Taxonomy may apply more broadly to regulations beyond the CSRD) and that disclosures will be included as part of the CSRD reporting.
Companies may want to evaluate consistency between reporting under EU Taxonomy and the European Sustainability Reporting Standards (ESRS), both in terms of data points to consider and the outcomes of the double materiality assessment. For eligibility, companies report whether they are conducting activities that make a substantial contribution to one or more of six environmental objectives:
• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and reduction
• Protection and restoration of biodiversity and ecosystems
The activities that are included under each of the six objectives are specific to the relevant objective. For example, climate change mitigation activities are clustered in sectors that are heavy greenhouse gas (GHG) emitters, such as manufacturing, transport, energy, and buildings.
To determine whether an eligible activity is being conducted in a sustainable way (to become an aligned activity), it must pass through a three-step assessment:
• Technical screening criteria: To have a substantial contribution to one of the six environmental objectives, the activity must be done by reference to specific environmental criteria (e.g., not emitting more than specific amount of GHG emissions per unit of output).
• Do No Significant Harm (DNSH): In contributing to one objective, it is important not to undermine the other five objectives. The EU Taxonomy provides criteria to assess this, from conducting climate risk assessments to avoiding pollution.
• Minimum social safeguards: In contributing to climate objectives, it is important to avoid social and human rights harms. The EU Taxonomy references a range of soft-law instruments, such as the Organization for Economic Co-operation and Development’s guidelines for multinational enterprises, to assess this.
The EU Taxonomy requires companies to report on the degree of taxonomy alignment against a highly granular set of KPIs on the share of sustainable activities (both eligible and aligned) by revenue, capital expenditure, and operating expenses. These disclosures provide detailed insight into the amount of green revenues that companies have today, and (through the capex disclosures) their plans for increasing green revenues.
With a systematic approach based on leading practices, companies can successfully navigate the EU Taxonomy’s standards as a key element of their readiness efforts for the Corporate Sustainability Reporting Directive. EU Taxonomy disclosures will require the close cooperation of sustainability, finance teams, and advisors.
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