Steps for creating an EU Taxonomy report: complete guide with examples
Are you wondering how to create an EU Taxonomy report? Look no further, this guide of making a European Taxonomy report that meets the EU's standards for sustainable finance will walk you through the right steps to follow. It also includes some EU Taxonomy report examples to illustrate the process.
The EU Taxonomy is a hot topic in the field of finance, and reporting on it is becoming increasingly relevant. Not only can it demonstrate a company's commitment to responsible and sustainable business practices, but it also helps identify opportunities for improving environmental and social performance. Additionally, the EU Taxonomy provides a common framework for companies to use when reporting on their sustainable activities, which can make it easier for investors and other stakeholders to understand and compare their performance.
Compliance with the EU Taxonomy Regulation’s reporting requirements is mandatory for large, public-interest companies, but is also set to provide benefits for other companies that want to report voluntarily. This guide will give you a deeper understanding of how to write an EU Taxonomy report and provide you with the knowledge you need to stay ahead of the curve. So, whether you're a business looking to demonstrate your commitment to responsible, sustainable practices, comply with disclosure requirements, or just wondering what a taxonomy report should contain, this guide is for you. Keep reading to learn how to make an EU Taxonomy report that is compliant and sets your company on the right track.
Why do you need to write an EU Taxonomy report?
The EU Sustainable Finance Taxonomy is a classification system for environmentally sustainable economic activities. Companies may choose to do EU Taxonomy reporting for a variety of reasons, including:
By reporting under the EU Sustainable Finance Taxonomy, organizations can demonstrate their commitment to sustainability and provide clear and comparable information on their environmentally sustainable activities and investments..
Large (>500 employees), public-interest companies, or parents of groups meeting those requirements on a consolidated basis, are required to disclose information about their environmental and social performance under the taxonomy.
Shareholders, customers, employees, and other stakeholders are increasingly interested in understanding a company's sustainability performance, and may expect companies to provide this information.
Reputation and brand
Companies that can demonstrate their commitment to sustainability may be able to improve their reputation and brand, which can help attract and retain customers and employees.
Sustainability assessment and reporting can help companies identify and manage risks and opportunities related to environmental and social issues, which can improve their long-term performance.
The taxonomy helps investors and other stakeholders to identify and compare environmentally sustainable investments.
Companies that are transparent about their sustainability performance may be able to gain a competitive advantage by differentiating themselves from their competitors.
Better risk management
By considering environmental, social and governance (ESG) risks, organizations can identify potential risks and opportunities and take steps to mitigate them and capitalize on them.
Read our blog to get an overview of the EU Taxonomy timeline for reporting.
Steps of creating an EU Taxonomy report with an example
Gathering and preparing data needed for the report
Step 1: Gather data on a granular level. Collect data on the company's activities, assets, and financial information, including turnover, capital expenditure (CapEx), and operational expenditure (OpEx).
Step 2: Calculate the taxonomy score. Use the data collected to calculate the company's taxonomy score, which reflects its level of alignment with the EU Taxonomy's environmental objectives.
Step 3: Assess the minimum social safeguards. For its activities to be aligned with the taxonomy, a company must comply with the taxonomy’s minimum social safeguards and report on how they have assessed the minimum social safeguards on a company level.
Step 4: Determine the proportion of the company's activities that are eligible and aligned with the EU Taxonomy.
Step 5: Calculate the proportion of the company's CapEx, OpEx, and turnover that is eligible and aligned with the EU Taxonomy. The KPIs should be provided at the level of the individual undertaking where that undertaking prepares only individual non-financial statements or at the level of the group where the undertaking prepares consolidated non-financial statements.
Step 6: Use the templates provided by the EU in Annex II to the Disclosures Delegated Act to report on the company's key performance indicators (KPIs), activities, eligible activities, aligned activities, non-eligible activities, and eligible but non-aligned activities. This also includes the proportion of transitional and enabling activities. There are three templates: one for turnover, one for CapEx, and one for OpEx. The annual reporting period will use data for the previous financial year (i.e. reporting on 2022 data in the 2023 report).
Step 7: Include information on the previous annual reporting period. From 2023, companies should also include information on the previous annual reporting period.
Step 8: The KPIs should be reported in the same currency as the company's annual financial report.
Note: The KPIs should cover only the objectives of climate change mitigation and climate change adaptation (the activities covered in the Climate Delegated Act (CDA)) until 12 months after the date of application of the delegated regulations that contain the technical screening criteria for the other environmental objectives (i.e. the Environmental Delegated Act (EDA)). If the company chooses to report on EDA activities before it is required to report, then these should be marked clearly as voluntary reporting and an explanation of why these activities are included should be provided.
What to include in the EU Taxonomy report
Step 9: The report should contain information on the EU taxonomy and why it is relevant to the company, including whether reporting is mandatory or voluntary, or if the company is reporting as a consolidated group.
Step 10: The report should include information on the methodology used to carry out the taxonomy assessment (e.g. how the company has been structured into activities/assets, how financial data has been assigned to each activity, how activities have been chosen). If a software or third party has been used to carry out the assessment, their methodology should be described.
Step 11: The report should include information on the accounting principles used by the company, such as whether the company is using IFRS or national GAAP principles, and how the taxonomy definitions of the KPIs have been taken into account. For turnover and capital expenditure, non-financial undertakings should include references to the related line items in the non-financial statements.
Step 12: Include information on compliance with the EU Taxonomy Regulation (EU) 2020/852 and its delegated acts. The report should include information on how the company has assessed compliance with the taxonomy criteria for selected activities and the associated technical screening criteria included in the delegated acts. This should include any assumptions made about the criteria.
Step 13: Include the templates from Annex II of the Disclosures Delegated Act.
Step 14: Example of EU Taxonomy reporting, which should explain how the company has avoided any double counting in the allocation of turnover, CapEx, and OpEx KPIs across economic activities.
Step 15: Include contextual information on the KPIs such as a quantitative breakdown of the numerator in order to illustrate the key drivers of changes in the KPIs during the reporting period, information about the amounts related to Taxonomy-aligned activities pursued for non-financial undertakings’ own internal consumption, key information on CapEx plan.
Step 16: (Optional) Include graphics or a simplified table. The report may include graphics or a simplified table showing the level of eligibility and alignment for the company's activities, in addition to the EU tables.
Step 17: If an audit has been carried out, the report should include information on the level of assurance and who carried it out.
Challenges you may face creating an EU Taxonomy report
Now, we are at the stage where European Taxonomy reporting is either mandatory or needed to have to attract investors' attention. Creating an EU report can be a challenging and time-consuming task, but it is an important part of doing business in the European Union. In this section we will discuss some of the most common challenges of creating a european taxonomy report that companies may face.
Limited resources, time and budget constraints
Creating an EU taxonomy report can be a time-consuming and complex process, and one of the most common challenges that companies face when creating an EU taxonomy report is limited resources. Companies may face time and budget constraints that make it difficult to complete the report on time and within budget. This can include a lack of staff or expertise to gather and analyse the necessary data and to compose the report. To solve this challenge, companies can outsource the report creation process to a third-party consultant who has the necessary expertise and resources. Companies can also invest in software that assists with the data collection and analysis process, which can save time by streamlining the reporting process and build internal competence on sustainability reporting.
Changing compliance requirements
Another common challenge that companies may face when creating an EU taxonomy report is ensuring compliance with the latest regulations and requirements set out by the EU. The taxonomy is a fairly new framework, and is set to be updated and developed quickly. Companies should conduct regular reviews of their reports and processes to ensure they are in compliance with any changes to regulations. To simplify this, companies can work with experts who are familiar with EU regulations and the EU taxonomy and can provide guidance on how to meet requirements.
Ensuring the quality of data used in the report is also a challenge that companies may face. Incorrect or incomplete data can lead to inaccurate conclusions and can damage the company's reputation. To solve this challenge, companies should establish clear procedures for data collection, verification, and validation. Additionally, companies should also invest in tools for data management and analysis that can help to identify and correct errors.
Do it yourself or delegate: what is better?
In addition to the traditional options of doing it yourself or delegating to professionals, companies can also consider using softwares like Celsia’s EU Taxonomy reporting software to assist with the EU taxonomy report creation. This can provide a balance between the cost-effectiveness of doing it yourself and the accuracy of delegating to professionals. Celsia’s software solutions can automate the data collection and analysis process, making it easier and more efficient for companies to comply with the EU taxonomy reporting requirements.
Celsia’s software solution can also provide scalability for companies to grow and expand their reporting needs. It can also save costs in the long run as it eliminates the need for hiring or outsourcing professionals to do the reporting. It's still important to have a good understanding of the EU taxonomy reporting requirements.
Ultimately, the decision of whether to do it yourself or delegate will depend on the specific needs and resources of the company. It's important to weigh the cost-benefit of both options, and consider the potential risks and benefits of each. Before making a decision, it's also a good idea to consult with experts in the field to get a better understanding of the requirements and tips to write an EU taxonomy report.
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