EU Taxonomy: Sustainability as a reportable KPI

Sustainability is undoubtedly one of the dominant issues of our time. Ambitious targets and effective measures are needed to curb climate change and mitigate global warming. The European Commission, for example, has set itself the goal of being climate-neutral by 2050. Over the same period, global CO2 emissions are to be reduced by 80 to 95%.

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Classification for sustainable action

On the way to achieving these goals, policymakers are also increasingly taking business to task. The EU Taxonomy for Sustainable Activities introduces classification criteria for sustainability throughout the European Union. This means that in the future, economic and investment activities must be evaluated and disclosed according to their sustainability.

As early as January 1, 2022, the EU Taxonomy for Sustainable Activities will apply to all companies in the member states of the European Union that are subject to non-financial reporting in accordance with the CSR directive. In the future, they will be obliged to provide information on how and to what extent they are involved in ecologically sustainable economic activities. The reporting obligation covers the respective ecologically sustainable share of the key performance indicators revenue, capital expenditure (CapEx) and operating expenditure (OpEx).

How the EU Taxonomy defines sustainability

For the purposes of the EU Taxonomy, an economic activity is considered compliant if it makes a significant contribution to at least one of the following environmental objectives:

• Climate protection
• Adaptation to climate change
• Sustainable use and protection of water and marine resources
• Change to a circular economy
• Pollution prevention and control
• Protection and restoration of ecosystems and biodiversity

In addition, the EU Taxonomy stipulates that sustainable economic activity must not significantly compromise one or more other environmental objectives in the process (do-not-harm principle), as well as exercise a minimum level of protection with regard to human rights and comply with the technical assessment criteria set out in the EU Taxonomy for Sustainable Activities. For the 2021 financial year, companies are already required to provide the relevant information for activities that contribute significantly to climate protection or adaptation to climate change – i.e., to environmental objectives 1 and 2. From the 2022 financial year, disclosures for significant contributions to the other EU environmental objectives will then also be mandatory.

What is to be done for companies?

In order to meet their reporting and verification obligations as defined by the EU Taxonomy, the affected companies face a number of tasks. For example, they must evaluate their activities with regard to environmental sustainability, identify relevant activities and assess their taxonomy compliance, and obtain the relevant evidence. On the systems side, the sustainability assessment must be transferred to the financial indicators and an inventory must be made of the systems and processes that can be used to collect data for the taxonomy-relevant indicators.

A proper implementation requires a certain amount of time and the involvement of in-house experts beyond the sustainability department. In particular, the department responsible for recording sales revenues, capital expenditures and operating expenses (controlling or accounting) should be involved. It should also be considered that the review of economic activities for taxonomy conformity and the establishment of a corresponding reporting system must be managed in parallel with day-to-day business and that the project team is dependent on the input of a number of experts from within the company.

Conclusion: Sharpening the focus on sustainability

With the EU Taxonomy, the European Union has created a classification system that defines whether companies operate in an ecologically sustainable manner. The rules aim to establish a uniform understanding of the sustainability of business activities in the EU. It also aims to avoid greenwashing of sustainable financial products. Greater consideration of sustainability in annual reports increases their informative value and makes companies’ reporting more comparable.

It can be assumed that the EU Taxonomy for Sustainable Activities will not only be relevant in practice for those companies that are subject to it by law. Rather, other companies will also have to deal more closely with the issue of sustainability. This is because, on the one hand, companies subject to reporting requirements will demand corresponding proof of sustainability from their suppliers. And on the other hand, financial institutions, for which the EU Taxonomy is also binding, will expect corresponding disclosures from their customers so that they can assess whether the investments are sustainable. In this respect, almost all companies, regardless of size, are challenged to address the question of how they can expand and substantiate their sustainable economic activities.