CSR, ESG, CSRD, ESRS, EU Taxonomy could also be phrases from the song ‘Mit freundlichen Grüßen’ by the Fantastischen Vier. These abbreviations are all related, but still have very different meanings. But what exactly is behind these terms? And how does the EU taxonomy relate to other regulatory measures and concepts?
In this blog post, we will embark on a journey through the world of the Taxonomy Regulation. The focus will be on the EU taxonomy and how it relates to the CSRD (Corporate Sustainability Reporting Directive).
Basics of the EU taxonomy
A ‘taxonomy’ is a standardized procedure with which objects are classified according to certain criteria and can be categorized. The EU taxonomy is more than just another term in the jumble of financial and sustainability terminology. It forms the foundation for sustainable finance in Europe and defines the criteria according to which activities can be classified as environmentally friendly.
What is the EU taxonomy?
The EU Taxonomy is a classification system developed to determine which economic activities can be considered environmentally sustainable. The main objective of this system is to steer financial flows and investments towards sustainable projects and activities by establishing clear and binding criteria for environmental sustainability. It serves as a guide for companies and investors to ensure that they act in accordance with sustainability goals such as the EU’s European Green Deal. Companies can achieve up to 100 points depending on how closely their business activities match the taxonomy.
History and development of the EU taxonomy
The idea of a taxonomy for sustainable finance in Europe arose in response to the growing realization that the financial sector plays a crucial role in the implementation of global and European environmental and sustainability goals.
The EU Taxonomy was introduced as part of the European Commission‘s Action Plan for Financing Sustainable Growth which was presented in 2018 was launched. Since then, it has gone through several stages of development, with stakeholders, experts and policy makers working together to create a robust and effective system.
The EU taxonomy is related to the CSR Directive Implementation Act (CSR-RUG), which is the German implementation of the EU requirements on the Non-Financial Reporting Directive (NFRD). The taxonomy also provides the classification system used in the Sustainable Finance Disclosure Regulation (SFDR) and the CSRD.
EU Taxonomy 2023: What's new?
On June 13, 2023, the EU Commission presented a new package of measures to build on and strengthen the foundations of the EU sustainable finance framework. It has approved in principle a new set of EU taxonomy criteria for economic activities that make a significant contribution to one or more of the non-climate-related environmental objectives:
- Sustainable use and protection of water and marine resources,
- Transition to a circular economy,
- Prevention and reduction of environmental pollution,
- Protection and restoration of biodiversity and ecosystems.
In addition, changes have been made to the EU taxonomy to mitigate climate change and adapt to new climatic conditions. The inclusion of more economic activities covering all six environmental objectives, and consequently more economic sectors and companies, will increase the usability and potential of the EU taxonomy in scaling up sustainable investment in the EU. Further information can be found in the EU Commission’s factsheet ‘Sustainable Finance’.
Relevance of the EU taxonomy in the European context
In Europe, the pressure on companies and financial institutions to act more sustainably and transparently is increasing. The EU taxonomy (EU Tax Regulation) provides a uniform language and a clear framework for this. It helps to avoid “greenwashing” – the pretense of environmental friendliness – and ensures that investments actually have a positive ecological impact. In a continent that is becoming global pioneer in sustainability the EU Tax Regulation plays a central role in creating clarity, trust and credibility in the green financial market.
Main elements and key aspects of the EU Taxonomy Regulation
The main purpose of the regulation is to provide a clear and consistent basis for the definition of sustainability and to ensure that investments labeled as “green” or “sustainable” actually meet such criteria.
The EU Taxonomy Regulation is complex and detailed, but four main elements stand out:
- Definition of environmentally sustainable activities: The ordinance defines which economic activities can be considered environmentally sustainable based on specified criteria.
- Six environmental objectives: The regulation identifies 6 environmental objectives that an activity must fulfill in order to be classified as sustainable. These include climate protection and the protection of water and marine resources.
- Technical screening criteria: Specific technical criteria are defined for each sustainable activity to determine whether and to what extent this activity contributes to the environmental objectives.
- Reporting obligations: Companies and financial institutions must disclose the extent to which their activities and investments comply with the EU taxonomy.
Which companies are affected by the EU taxonomy reporting obligation?
Since January 1, 2022 for the 2021 financial year, the EU Tax Regulation comes into force. The following companies are affected by the EU Taxonomy:
- Capital market-oriented companies (which must publish a non-financial company report in accordance with the Non-Financial Reporting Directive (NFRD))
- Financial market participants (e.g. banks and insurance companies)
With the gradual entry into force of the Corporate Sustainability Reporting Directive from 2024, more and more companies will be affected by the Taxonomy Regulation and will be obliged to publish sustainability reports (Art. 8 (1) EU Tax Regulation). Von der CSRD affected are all “large companies”, small and medium-sized enterprises (SMEs) and, under certain circumstances, non-European companies. European companies.
The EU taxonomy and which companies are affected by it is briefly explained in the following video:
What specifically needs to be reported?
- Turnover: The proportion of business turnover from economic activities classified as ecologically sustainable (“taxonomy-compliant”) in relation to the company’s total turnover.
- Capital expenditure (CapEx): Share of “sustainable” investments as a percentage of the company’s total investments. Investments are considered sustainable if they meet the following criteria: (i) investments in processes and assets from taxonomy-compliant economic activities; (ii) expenditures for the planned expansion of such ‘green’ economic activities; and (iii) expenditures for economic activities and individual measures that can achieve decarbonization or greenhouse gas reduction within 1.5 years.
- Operating expenses (OpEx): The share of taxonomy-compliant operating expenses (incl. training costs and R&D) analogous to ‘sustainable CapEx’ in relation to direct operating expenses (R&D; building renovation; short-term rental; maintenance & repairs; ongoing maintenance of property, plant and equipment).
How companies can ensure their compliance
- Internal review: Companies should establish internal processes to ensure that their activities meet the criteria of the EU taxonomy.
- External consultants: The involvement of external experts or consultancies can help to ensure compliance with these new regulations and ensure that reporting meets the requirements.
- Training and education: It is important that both managers and employees are informed about the EU regulation and its implications to ensure correct reporting.
When does the EU taxonomy apply?
One of the most common misconceptions about the EU Tax Regulation is that it applies immediately and in full to all companies. In fact, the implementation was planned in stages to give companies the necessary time to adapt.
Timeline of taxonomy implementation and application
- Introduction and adoption: The EU Taxonomy Regulation was adopted in June 2020 and provides the legal framework for the future development of the taxonomy.
- Technical screening criteria: Following the adoption of the regulation, work began on the technical screening criteria for various economic activities to determine which can be considered environmentally sustainable.
- First mandatory application: Since 2022, companies have had to report for the first time on the extent to which their activities meet the criteria of the EU taxonomy. This relates in particular to the goals of climate protection and adaptation to climate change. A transition period has been set up for reporting on climate targets, which enables companies to gradually fulfill all requirements. This period lasts from 2022 until the end of 2023.
- Expanding the taxonomy: Since 2023, the taxonomy has been expanded to cover four more environment-related goals: sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
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Full applicationBy the end of 2023, all affected companies should have fully aligned their reporting and business practices with the Taxonomy Regulation, including the additional environmental targets.
Relationship between CSRD and EU taxonomy
The issue of sustainability in the corporate world is undoubtedly complex, and instruments such as the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) play a crucial role in bringing clarity and consistency to this area. A key feature of the CSRD is its double materiality. But how exactly are these two instruments connected? And what does this mean for companies in Europe?
While the EU taxonomy provides a classification system to determine what qualifies as an environmentally sustainable economic activity, the CSRD ensures that companies report transparently on these activities. In a way, they work hand in hand:
- Uniform criteria: The CSRD refers to the criteria of the EU taxonomy when it comes to how companies should report on their environmentally sustainable activities. Accordingly, CSRD-compliant companies must include the above-mentioned key figures in their sustainability report.
- Avoiding greenwashing: The combination of CSRD and the EU taxonomy ensures that companies not only report correctly on their green activities, but that these actually meet the defined criteria. See also our Green Claims Checklist.
Sources and further information
For those who want to delve deeper into the topic of EU taxonomy, there are a variety of resources that provide both a general overview and specific details.
- Wikipedia: A good starting point for a comprehensive overview of the EU taxonomy is the Wikipedia article. Here you will find a detailed description of the taxonomy, its history and the content of the regulation.
- Official EU resources: The European Commission has extensive information on the EU taxonomy on its website, including official documents, FAQs, a taxonomy calculator and technical guidelines. It’s worth a visit for anyone who wants to delve deeper into the subject.
- Specialist literature and studies: Numerous specialist publications, studies and white papers deal with the EU taxonomy, its impact on the market and the challenges involved in its implementation.
- Webinars and seminars: Many organizations, consulting firms and universities offer training and information events on this taxonomy regulation. This is an excellent opportunity to learn from experts and exchange ideas with other interested parties.
Conclusion and outlook
The introduction and implementation of the EU Taxonomy marks a turning point in Europe’s quest for a more sustainable and environmentally responsible economy. With its clear criteria and vision, the taxonomy sets standards that companies, investors and consumers can use as a guide.
- Summary of key points: The EU Taxonomy provides a framework to define what is environmentally sustainable economic activity, sets out clear reporting requirements and helps pave the way for a greener economy in Europe.
- Significance for the future: The implementation of the taxonomy will undoubtedly present challenges, but its long-term value is undeniable. Not only will it help transform Europe's economy, but it could also serve as a model for other regions pursuing similar goals. In a world facing the effects of climate change and pollution, the EU Taxonomy represents a hopeful step towards a more sustainable future.
