What is the EU Taxonomy Regulation?
Central to the flagship Green Deal plan, the European Union (EU) has set the ambitious goal of achieving net zero greenhouse gas emissions (or ‘climate neutrality’) by 2050. One major impact on business is the upcoming Taxonomy Regulation, adopted by the European Parliament in June 2020.
The new legislation sets out the world’s first ‘green list’ of sustainable business activities. The taxonomy - a classification system for sustainable business practices - will provide investors and other stakeholders (including workforce, government, and civil society) with a universal set of sustainability metrics. The intention is to enable direct comparisons between companies, and also inform investment decisions, on the social and environmental impact of the business.
The six environmental objectives of the Taxonomy Regulation
1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems
The EU Taxonomy Regulation: What it is, what it is not
A list of economic activities and technical criteria
Flexible to adapt to different investment styles and strategies
Based on the latest scientific and industry experience
Dynamic, responding to changes in technology, science, new activities and data
A rating of ‘good’ or ‘bad’ companies
A mandatory list to invest in
Judging the financial returns of an investment
Inflexible or static (regularly reviewed/adapted)
Who is subject to the EU Taxonomy Regulation?
All public-interest entities headquartered in Belgium and under the scope of the EU Non-Financial Reporting Directive 2014/95 (NFRD), as defined by Article 4/1 of the Belgian Company Code (BCC), are required to make specific disclosures from 1 January 2022.
The regulation is primarily aimed at the financial sector, with a view to accelerating sustainable investment. However, businesses operating in other sectors will also have to comply with the new regulation and disclose the sustainability impact of their activities. All businesses to which NFRD currently applies will be required to classify turnover and (capital or operating) expenditure in accordance with the taxonomy.
While the Taxonomy Regulation enters into force on 1 January 2022, companies are required to collect additional technical data and information from the previous calendar year to demonstrate their alignment with the taxonomy and its three dimensions:
technical screening criteria,
Do No Significant Harm, and
minimum social safeguards.
That means businesses have to start preparing now.
How should companies prepare for the EU Taxonomy Regulation?
Under the Taxonomy Regulation, companies will be required to report:
The proportion of total turnover derived from products or services associated with taxonomy-aligned activities
Proportion of capital expenditures and/or operating expenses related to assets or processes associated with taxonomy-aligned activities
Organisations are required to report according to the taxonomy (as of 2022) to clearly indicate how and to what extent their activities are associated with taxonomy-aligned activities. In the initial phase, taxonomy alignment will only apply to the first two of the six objectives (climate change mitigation and climate change adaptation), with the four remaining objectives to be covered in subsequent years.
It’s advisable to begin with the guidance of an assurance provider. The assurance provider helps to identify best practices, areas for improvement, the potential impact on the organisation, and common pitfalls. PwC’s cross-functional specialists can guide companies through each stage of Taxonomy Regulation preparation and implementation, ultimately leading to an effective and compliant business strategy. This ensures that the company stays ahead of the ongoing megatrend of sustainability legislation.
Complying with the taxonomy and technical screening criteria - steps to follow:
| 1 | Screen products to gain an overview of activities that fall within the scope of the taxonomy |
| 2 | Gain an understanding of what’s required for those activities to be compliant with the Taxonomy Regulation |
| 3 | Create a decision tree/flowchart to identify the data requirements for each type of activity |
| 4 | Prioritise the sectors and data requirements |
| 5 | Develop a roadmap to close data gaps |
| 6 | Define who is responsible within the company to implement the requirements on both procedural and organisational levels |
| 7 | Analyse the feasibility of reporting on financial metrics |
Companies need to take action now
Establishing a framework for sustainable business practices is just the beginning of the European Union’s ambitions for sustainable development. More regulations will follow. For example, it’s expected that the NFRD will be revised to include more businesses, more sustainability criteria, and more stringent non-financial reporting requirements.
The taxonomy is the basis for future regulation. This first focus is on climate change adaptation and mitigation. Going forward, it is anticipated that societal and governance criteria will be introduced.
Businesses that can classify, in a timely and clear manner, their turnover and (capital) expenditure as being environmentally sustainable will be best prepared for further legislation. These frontrunners will be positioned to benefit from capital market opportunities and advantages. But the groundwork must begin now.
Taxonomy Regulation opportunities
Despite the effort and expertise required to prepare, the taxonomy is clearly a positive initiative. Capital markets will prioritise sustainable investments more than ever, in order that investment portfolios meet the required sustainable development standards. The concept of corporate social and environmental responsibility enjoys broad public support. The proper application of the taxonomy enables businesses to reduce costs and attract new investors, fostering long-term sustainable growth. Most importantly, the EU Taxonomy Regulation will be a major driver towards the ultimate goal of a more sustainable, ethical and circular economy.
For more information on the EU Taxonomy Regulation, the impact on business and how to prepare, please get in touch today.
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