In an era where global environmental challenges require a unified and systemic approach to sustainability, the European Union has taken a pioneering step towards redefining economic activities in alignment with sustainability goals.
The EU Taxonomy Regulation stands at the forefront of this transformative journey towards Carbon neutrality as the new evolutionary era. The taxonomy is a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate.
The Essence of EU Taxonomy Regulation
The Taxonomy Regulation was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020. It establishes the basis for the EU taxonomy by setting out the 4 overarching conditions that an economic activity has to meet in order to qualify as environmentally sustainable: climate change, pollution, environmental degradation, and resource depletion.
Scope and Evolution of the Taxonomy
The EU Taxonomy Regulation is a continuously evolving framework. It initially applied to listed companies, banks, insurance companies, and financial market participants (FMPs) with over 500 employees. However, it is expected that the European Commission will expand the mandatory reporting requirements to encompass a broader range of companies and sectors over time.
The scope of the Taxonomy aligns with the EU Non-Financial Reporting Directive (NFRD) and the EU Sustainable Finance Disclosure Regulation (SFDR). The adoption of the Corporate Sustainability Reporting Directive (CSRD) has further extended the reach of the EU Taxonomy.
With ongoing focus on sustainability at the basis of EU Taxonomy Regulation, an increased number of businesses are obliged to disclose their compliance with the Taxonomy’s criteria. This broadening includes large companies, listed SMEs, and businesses meeting specific criteria related to employees, revenue, and assets. In total, approximately 50,000 companies fall within the scope of these new reporting obligations. Companies that must adhere to the CSRD are those meeting two of the following conditions:
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- €50 million in net turnover.
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- €25 million in assets.
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- 250 or more employees.
This includes:
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- Large, listed corporations, banks, and insurance companies already subject to the NFRD.
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- Other listed EU companies previously not subject to the NFRD.
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- Listed European SMEs (that can report using simplified standards).
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- Large private European companies.
In addition, non-European companies with significant business in the EU (i.e., annual turnover of above €150 million in the EU) will need to comply.
Measuring Sustainability within the Taxonomy
The EU Taxonomy Regulation mandates organizations to publicly disclose the extent to which their turnover aligns with the Taxonomy’s criteria for green or sustainable economic activities.
These activities are classified as either eligible or aligned. Aligned economic activities make a substantial contribution to one or more of the EU’s environmental objectives without significantly harming any of these objectives while meeting minimum social safeguards.
Aligned environmentally sustainable economic activities must:
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- Significantly contribute to at least one of six environmental objectives, such as climate change mitigation, transition to a circular economy, and protection of biodiversity.
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- Avoid causing harm to other environmental objectives.
- Comply with the specific technical-screening criteria outlined in the Taxonomy.
Reporting under the Taxonomy
Reporting requirements under the Taxonomy Regulation vary based on the type of organization:
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- Companies (Non-Financial): Mandated companies must disclose the proportion of their turnover, capital expenditures (CapEx), and operational expenditures (OpEx) associated with environmentally sustainable economic activities that align with the EU Taxonomy criteria. This information should be included in the business’s non-financial statement(s) as per Article 19A of the Non-Financial Reporting Directive (NFDR).
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- Other Financial Market Players (FMPs): FMPs, including asset managers and larger entities, are required to disclose the extent to which their activities and the activities funded by their financial products align with the EU Taxonomy criteria.
- Voluntary Reporting: Beyond regulatory requirements, SMEs and non-listed companies can voluntarily employ the Taxonomy to strengthen their sustainability strategies and attract green investors, particularly as more investors integrate the Taxonomy into their due diligence processes.
Future Implications and Global Reach
The influence of the EU Taxonomy Regulation extends beyond European borders, with European investors and globally operating European companies applying its principles to their global operations. This phenomenon is affecting foreign markets conducting business with or within Europe.
It has become a cornerstone of the global shift towards a more sustainable economy, with other countries looking to the EU for insights into sustainable policy implementation.
In conclusion, the EU Taxonomy Regulation is more than just a framework; it’s a catalyst for a sustainable and responsible future. Its wide-ranging implications are shaping the trajectory of global business, emphasizing the need for businesses to acquaint themselves with the Taxonomy and stay ahead in the sustainable transition.
Ready to embark on your journey toward EU Taxonomy Regulation? Book a free demo with Carbon Tool today and take the first step towards a more sustainable and responsible business future.
