EU-Taxonomy

It is a uniform classification system that determines which activities are "ecological", i.e. environmentally sustainable. It helps investors and lenders to identify sustainable investments and protects them from greenwashing, and encourages companies to adopt climate-friendly practices. The EU taxonomy seeks to redirect capital towards sustainable activities, making it increasingly difficult for companies that do not meet the taxonomy's requirements to access new capital and finance.

The legislation covers more than 100 economic activities across 16 sectors, which together account for >90% of direct and indirect greenhouse gas emissions in the EU.

The methodology integrates six environmental objectives:

1. Climate change mitigation

2. Climate change adaptation

3. The sustainable use and protection of water and marine resources

4. The transition to a circular economy

5. Pollution prevention and control

6. The protection and restoration of biodiversity and ecosystems

‘Sustainable’ economic activity, when?

An economic activity shall qualify as environmentally sustainable when that economic activity:

• Contributes substantially to one or more of the environmental objectives;

• Does not significantly harm ("DNSH") any of the environmental objectives;

• Complies with the minimum social safeguards (e.g. the UN Guiding Principles on Business and Human Rights); and

• Meets technical screening criteria (e.g. upper limit set on CO2 emissions).

There is currently mandatory taxonomy reporting for companies that fall under the scope of the Non-Financial Reporting Directive ('NFRD'). The NFRD will be replaced by the CSRD in the future. As a result, the scope of companies required to report will evolve from 12,000 to over 50,000.

Action plan for the EU Taxonomy

1. Eligibility

   The first step considers which economic activities qualify for the EU taxonomy at all. The European Commission has provided a comprehensive list where one can systematically check which 'ecological' activities within each of the sectors fall within the scope of the EU taxonomy. If an activity is not listed, it is not "eligible" and therefore does not qualify as "sustainable. Examples include coal mines.

   Pro tip: consult the 'EU Taxonomy Compass' for a comprehensive overview of potentially 'ecological' activities. This tool provides clear insights into the objectives to which the activities substantially contribute and the criteria that the activities should meet.

2. Alignment

   The "eligible" activities must then comply with the technical screening criteria. This process involves three key assessments: firstly, confirming that the activity makes a significant contribution to one of the six environmental objectives; secondly, ensuring that the activity does not cause significant harm to any of the other environmental objectives; and thirdly, adhering to minimum social safeguards, such as those outlined in the OECD guidelines.

3. Calculation of financial KPIs

   The following financial KPIs must be calculated for aligned activities:

   • The percentage of the revenue coming from products or services related to the aligned economic activities; and

   • The percentage of the capital expenditure (CapEx) and operating expenditure (OpEx) related to assets or processes linked to the aligned activities.

4. Reporting

   The mentioned Key Performance Indicators (KPIs) are subsequently included in the management report, in accordance with the CSRD reporting obligations. A specific format, presented in tabular form, displays the percentages of revenue, Capital Expenditures (CapEx), and Operating Expenditures (OpEx) categorized as eligible or non-eligible, as well as aligned or non-aligned. Additionally, you are required to document the inputs, outputs, and the methodology used for these calculations.