What it is and what it means for your company
In 2019, the European Union presented the Green Deal, a set of policy initiatives aiming at several environmental targets, including a climate-neutral Europe by 2050. To tackle the challenges of greenwashing, with no common definition of a sustainable investment and the lack of sustainability considerations in investment decisions, the EU put forward the Action Plan on Sustainable Finance. The plan included ten measures within three categories:
As part of redirecting capital flows towards sustainable activities, the EU has decided to implement a classification system, a “taxonomy”, of sustainable activities, with criteria for when they may be defined as sustainable. If your business activity is listed in the taxonomy and you fulfill all criteria, the associated revenue, capital expenditures (CAPEX) and operational expenses (OPEX) with that activity are considered "taxonomy aligned".
The EU operates with six environmental objectives, where an activity has to:
April 21st 2021, the EU published a revised version of the criteria first launched in 2020, based on input from the Union countries. This version primarily addressed climate change and was formally adopted on June 4th 2021. Criteria related to the other environmental aspects in the taxonomy are - as of August 2021 - to come shortly.
From January 1st 2022, all large companies are required to report their taxonomy alignment, along with relevant information that may help investors assess their ESG performance. In this regard, the EU defines all large companies as companies that are not SMEs (SMEs are companies with less than 250 employees, and with a balance sheet less than 43 million euros or a turnover less than 50 million euros). Small and medium sized companies that are listed on the stock exchange, are also required to report.
Small and medium sized companies can report on a voluntary basis, but will be affected by the EU’s upcoming Corporate Sustainability Reporting Directive. Under the directive, all large companies (>250 employees) and all listed companies (except listed micro-companies) will be required to report on their sustainability performance in accordance with the taxonomy.
Investment funds will also have to report on taxonomy alignment, and will be required to collect data required to assess the degree of taxonomy alignment or assess the portfolio companies themselves.
The bottom line is: If you’re a big company you have to report and if you have an investment fund as owner you should report, as the investment fund will anyhow request the relevant data from you.
By 2024, we expect most companies, large and small, to be assessing and disclosing their taxonomy alignment, partly because it may positively impact a company's bottom line.
Following the EU Directive on sustainability-related disclosures in the financial sector, in effect from 2021, banks are required to assess their debtors’ sustainability performance. In addition to this being a requirement, banks will also have access to lower-cost capital from EU, national and private sources for sustainable credit.
(With the new proposed Corporate Sustainability Reporting Directive, the EU is also proposing the development of separate, proportionate standards for SMEs, so we anyhow expect also SMEs to be required some level of reporting shortly)
In sum: Reporting on degree of alignment with the taxonomy is a proactive move towards your stakeholders - in particular your investors and creditors - and may lower your cost of capital.
To report degree of alignment with the taxonomy, you should:
While 5) should be conducted continuously or at least on an annual basis, 1-4 should be conducted when required -this means, whenever there are updates to either the taxonomy or the directives and standards in the references.
We know that you may not have people dedicated to staying up-to-date on all the latest ESG legislature, with the capacity to develop and iterate on reporting frameworks in line with the taxonomy. We believe it's more efficient if we take care of that part, and split the cost among all our clients. The EU Taxonomy isn't perfect, but it has clear criteria that are well-suited for a standardized tool.
Instead of hiring external parties to assess your business against the taxonomy criteria, we give you the tool to do it yourself. From the list above, we take care of 1-4, and set you up to do 5 yourself.