The EU Green Taxonomy was created in the framework of the European Green Deal in order to increase transparency in the market, mitigate risks of greenwashing and subsequent reputational risks for financial institutions.
The recently approved Corporate Sustainability Reporting Directive (CSRD) requires large companies to disclose information on the way they operate and manage social and environmental challenges; it strengthens the previously existing legislation on non-financial information reporting and also widens the scope of companies required to comply.
Who is impacted?
All large companies (listed on the stock market or not), will need to follow the new EU sustainability reporting requirements with the following urgency:
EU Taxonomy Timeline (Source: European Parliament)
*Public interest companies include:
- Banks and insurance companies, public or private;
- Public companies, financial or non-financial;
- Designated by Member States as public interest entities;
Non-EU companies with substantial activity in the EU (with a turnover over €150 million euro in the EU) will also have to comply.
There is a high probability for your company to fall into this scope!
What are the potential advantages of applying this regulation?
Whether your company falls in the scope of application of the regulation or not, applying the EU Taxonomy to your business will have major positive impacts, including:
EU Taxonomy Positive Impacts (Source: ESG Playbook)
What if my company does not comply?
The EU Taxonomy regulation does not (yet?) define penalties for companies which do not comply, however potential consequences are varied and can have great impacts on the business such as:
EU Taxonomy Penalties (Source: ESG Playbook)
What is the main objective?
The EU Green Taxonomy classifies economic activities and identifies the criteria which make an industry sustainable or not. It specifies the key performance indicators (KPIs) related to turnover, capital expenditure (CapEx) and operational expenditure (OpEx) that non-financial undertakings must disclose. At the end of the analysis, a company should be able to communicate the percentage of each of these 3 KPIs which is eligible and/or aligned with the EU Green Taxonomy.
How is the EU Green Taxonomy structured?
The EU Green Taxonomy is built around 6 objectives which companies might be working towards in their day-to-day activities, namely:
Economic activities which contribute to each of these objectives were defined by the EU based on its Greenhouse Gas emission profile and on whether the activity could be conducted in a greener way.
All economic activities in scope are listed and detailed in the EU Taxonomy Compass website. Examples of such activities are:
- Acquisition and ownership of buildings
- Co-generation of heat/cool and power of solar energy
- Manufacture of batteries
- Transport by motorbikes, passenger cars, and light commercial vehicles
The EU Taxonomy Compass goes on to describe which criteria should each economic activity comply with to be eligible under its framework.
Important:
Only a sample of all potential economic activities are found and listed in the EU Green Taxonomy. While the list is still being developed, it might be that a company sees very few of its activities included in the list. As a result, its percentages of turnover, CAPEx and OPEx eligible will be very low but still must be reported as such.
Once an economic activity has been identified, it is required to verify whether:
How can external solutions help?
Different softwares nowadays propose services to ensure compliance by clarifying EU Taxonomy requirements, collecting data, and performing the relevant calculations as required by the regulation. This is helpful to understand and comply with a regulation which is in constant development and which asks for different sets of data in the company.
The SAP PaPM model, is an example of a solution which allows business users to check the eligibility and subsequently, the percentage alignment of the CapEx, OpEx and Turnover of their economic activity, along Taxonomy Regulation. With this, they can identify risks at an early stage, think out plans for a green transition, and gain a competitive advantage. For more on this solution, check out this article.
Most companies are only getting familiar with this process, but they must do so rapidly since, as we have seen above, this is becoming a compulsory reporting for an increasing number of firms!
Please share your feedback or thoughts in the comments section. You can also follow the SAP Profitability and Performance Management and SAP Sustainability communities for more info; feel free to post and answer questions about Sustainability or read other posts about Sustainability.
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References:
EU Taxonomy European Commission FAQs, EU Taxonomy Compass, ESG Playbook, SAP PaPM EU Taxonomy Solution
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