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Géraldine d'Argembeau
Financial Services Partner, ESG & Sustainable Finance
PwC Belgium
Colin Metzler
Director, Sustainable Business Solutions,
PwC Belgium
How Industrial and Financial Companies Implement the EU Taxonomy Regulation
The EU Taxonomy Regulation provides the classification framework for sustainable economic activities accompanied by disclosure obligations. It aims to steer investments towards sustainability by promoting transparency and comparability across sectors. The regulation distinguishes between "taxonomy-eligible" and "taxonomy-aligned" economic activities: Taxonomy-eligible activities are those included in the EU Taxonomy's criteria catalogue for the six EU environmental objectives. Taxonomy-aligned activities are those that significantly contribute to at least one environmental objective based on set criteria, without harming other objectives ("Do No Significant Harm – DNSH") and ensure compliance with the Minimum Safeguards
The six environmental objectives of the taxonomy are: (1) climate change mitigation, (2) climate change adaptation, (3) sustainable use of water resources, (4) transition to a circular economy, (5) pollution prevention, and (6) protection of ecosystems and biodiversity. Industrial companies affected by the taxonomy must report on the three metrics of revenue, capital expenditures ("CapEx"), and operating expenditures ("OpEx"), while financial companies must report on their investment and financing activities.
Improved Quality of Reporting
Since 2022, PwC has been examining the progress companies make in taxonomy reporting. The current study is based on publicly available information from 530 industrial and 97 financial companies from twelve European countries. One of the key findings: Industrial and financial companies are now reporting much more consistently, and the proportion of taxonomy-eligible and taxonomy-aligned activities continues to increase , albeit slightly.
"The EU taxonomy drives companies towards sustainability with increased reporting and transparency under the CSRD. It's crucial for firms to enhance data quality and strategically use taxonomy insights to maximize opportunities in sustainable transformation."
Impact for Belgian companies
The impact of the EU taxonomy Regulation on Belgian companies is significant, driving a marked shift towards sustainability through enhanced reporting and transparency requirements. With the implementation of the regulation, Belgian companies are mandated to disclose their alignment with the environmental objectives, focusing initially on climate change mitigation and adaptation. This has led to an improvement in data quality and reporting consistency, although the alignment rates remain low.
The PwC EU Taxonomy study includes the BEl20 financial and industrial companies. As key insights for the Belgium market, we noted for:
Industrial companies:
The gap between Taxonomy eligible revenue of 29% and Taxonomy aligned revenue of 12% shows significant opportunities to further align the business with the EU Taxonomy
Data quality and comparability have overall increased compared to our 2023 EU Taxonomy study which is important to prepare for the upcoming audit requirement under the CSRD
Companies have consistently used the mandatory KPI reporting templates which creates improved clarity and comparability compared to prior year
Financial companies:
Belgian Credit institutions exhibit a notably lower Green Asset Ratio (GAR) stock and flow compared to the EU average, with GAR stock at 0.19% versus the EU's 2.31%, and GAR flow at 1.12% against the EU's 1.65%. This indicates that Belgian companies are trailing in aligning their asset portfolios with green activities.
In the insurance sector, 75% of Belgian companies use a partial premium approach, closely aligned with the 79% adoption rate in the EU. But, interestingly, Belgian insurance companies report higher average values in taxonomy-aligned insurance and reinsurance underwriting activities, at 2.90% compared to the EU's 1.94%, indicating better alignment in this specific area.
Overall, the Belgian market demonstrates a cautious yet progressive approach towards the EU Taxonomy Regulation. As almost all Belgian companies allocate a KPI value of 0 when faced with data limitations or inconsistencies. Which is a notably more stringent approach compared to averages at EU level (57%). This reflects a conservative stance in data reporting, which might affect the perceived sustainability performance but ensures data integrity. The rigorous data handling practices and strategic investments in specific energy sources reflect a unique market stance, while the improved transparency and reporting methodologies pave the way for better alignment with sustainable economic activities in the future.
Roadmap for Taxonomy Reporting
Financial and Industrial Companies
Reporting on Taxonomy Eligibility: Environmental Objectives 1 and 2
Climate Change Mitigation
Climate Change Adaptation
Non-Financial Companies
Reporting on Taxonomy Eligibility and Taxonomy Alignment:
- Environmental Objectives 1 and 2
Financial Companies
Reporting on Taxonomy Eligibility:
- Environmental Objectives 1 and 2
Financial and Non-Financial Companies
Reporting on Taxonomy Eligibility and Taxonomy Alignment:
- Existing Activities for Environmental Objectives 1 and 2, including changes
Reporting on Taxonomy Eligibility:
- Environmental Objectives 3–6
3. Sustainable Use and Protection of Water and Marine Resources
4. Transition to a Circular Economy
5. Pollution Prevention and Reduction
6. Protection and Restoration of Biodiversity and Ecosystems
- New Activities for Environmental Objectives 1 and 2
Non-Financial Companies
Reporting on Taxonomy Eligibility and Taxonomy Alignment:
- All 6 Environmental Objectives
- New Activities for Environmental Objectives 1 and 2
Financial Companies
Reporting on Taxonomy Alignment:
- Environmental Objectives 1 and 2
Reporting on Taxonomy Eligibility:
- All 6 Environmental Objectives
- New Activities for Environmental Objectives 1 and 2
Financial and Non-Financial
Companies Reporting on Taxonomy Eligibility and Taxonomy Alignment:
- All 6 Environmental Objectives
- New Activities for Environmental Objectives 1 and 2
The Study at a Glance
Clear Progress Among European Industrial Companies
In 2023, 93% of companies published information on the EU Taxonomy, an increase from the previous year (86%). Nearly 87% of the companies used the mandatory templates in their reporting, with 20% making adjustments to the templates. Innovations pertained to the publication of economic activities under Environmental Objectives 3–6. Almost 43% of the analysed reports related to one or more economic activities under the new environmental objectives.
Increasing Values in Taxonomy Eligibility and Alignment
Overall, the shares of taxonomy-eligible and taxonomy-aligned revenues and operating expenses increased slightly compared to the previous year. Only the taxonomy-eligible share of capital expenditures stagnated. As in the previous year, there was a significant discrepancy between taxonomy eligibility and alignment across all three KPIs: For revenue, the share of taxonomy eligibility was 30%, while the alignment share was only 9%. A similar pattern was seen for capital expenditures (taxonomy-eligible: 37%, taxonomy-aligned: 12%) and operating expenses (taxonomy-eligible: 30%, taxonomy-aligned: 9%).
Real Estate and Automotive Sectors with Highest Taxonomy Eligibility
The differences between sectors remain significant: The real estate and automotive sectors reported the highest percentage of taxonomy eligibility for all three KPIs, as they did last year. The energy, utilities, and raw materials sectors achieved the highest reported taxonomy alignment (revenue: 25%, capital expenditures: 33%, operating expenses: 30%). Almost three-quarters of all companies also provided comparison figures from the previous year—only 10% did so in 2022.
Financial Sector Benefits from Improved Data Quality
Financial companies had to report for the first time on the alignment for Environmental Objectives 1 and 2 (climate change mitigation and adaptation) for the 2023 financial year, using the significantly improved data quality and availability from their portfolio companies for the 2022 financial year. The mandatory use of EU templates also contributed to more uniform reporting.
Low "Green Asset Ratio" Among Banks
The range of taxonomy eligibility rates among financial institutions has significantly decreased, indicating improved data quality: It varies between 20% and 44% for revenue (previous year: 0% to 76%) and between 20% and 45% for capital expenditures. Alignment is a different story: it stands at only 2% for both revenue and investments. The key contributor for the revenue-based alignment rate (Green Asset Ratio, "GAR") of banks is the retail business, especially mortgages. The low alignment rate is due to a lack of data availability, inconsistent data collection methods, and inadequate coverage of a bank’s financing activities by the taxonomy eligibility criteria. This also highlights the long road ahead to meet the challenging taxonomy alignment criteria and achieve sustainable transformation of the economy.
Download the full study
EU Taxonomy Reporting 2024
Significant Differences in the Insurance Sector
In the insurance sector, taxonomy eligibility in the underwriting business varies widely, from 1% to 47%, due to different methodologies. For insurers' investments, the range is between 4% and 28% (revenue) and 4% and 32% (capital expenditures). Like banks, the average taxonomy alignment rate for insurers' investments is only 2%.
Limited Strategic Use of Taxonomy Data So Far
Due to the low rates, especially financial institutions have so far rarely used taxonomy data for strategic purposes such as investment decisions or portfolio management. However, this would be crucial for the taxonomy to achieve its goal of directing financial flows towards sustainable economic activities. It is essential to further improve data availability and for companies to use consistent methods.
Taxonomy Metrics as a Transparency Value and Potential Strategic Tool
Currently, taxonomy metrics mainly serve as a transparency value, but they could be used in the future to set concrete incentives to improve sustainability performance and for strategic management purposes. This has further implications: The EU Taxonomy could prompt companies to adjust their business practices, which might include investing in more environmentally friendly technologies and processes, as well as changes in supply chain and product offerings.
Opportunities for Innovation and Competitiveness
The EU Taxonomy requirements can motivate companies to improve their sustainability with innovative solutions, gaining competitive advantages and exploring new market opportunities.
Clear Focus on Sustainability
The further development of the EU Taxonomy means a stronger focus on sustainability for companies and increased reporting obligations. At the same time, it creates opportunities for innovation and competitiveness. It is crucial for companies to work towards improving data quality and use taxonomy data for strategic management purposes to optimally harness the opportunities arising from sustainable transformation.
"The EU Taxonomy's evolution means more reporting for companies and better benchmarking opportunities. Though data quality and comparability are improving, there's still room to grow. Companies will increasingly use this data to steer investments strategically, ensuring long-term competitive advantages for companies."
Colin Metzler,Director Sustainable Business Solutions at PwC BelgiumDownload the study
EU Taxonomy Reporting 2024
EU Taxonomy in Action Webinar
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The Methodology
For the study, PwC analysed the reports published by 30 April 2024 for the 2023 financial year from 530 publicly listed European industrial companies and 97 publicly listed European financial companies that fall within the scope of the EU Taxonomy.
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