The EU Commission's Taxonomy Regulation passed into law in June 2020, marking a significant step in sustainable finance. Now, as we have entered into 2021, companies are about to face their first milestone. The deadline for businesses to report on the taxonomy criteria is now imminent as some participants (in the financial market) will be required to complete their first set of disclosures against the Taxonomy by the 31st of December 2021.
In this blog we cover some of the essential aspects of the regulation so you can be sure that your company can meet the EU Taxonomy reporting requirements.
What is the EU Taxonomy?
The EU Taxonomy is a classification method intended for investors, firms and issuers. The new legislation sets higher standards for businesses to disclose economic practices that have been accepted as or can classify as sustainable.
The EU Taxonomy is a regulatory classification system which helps investors and companies define which economic activities are environmentally sustainable. The regulation also places a reporting obligation on several companies to disclose what proportion of their investments align with sustainable activities.
Will the new EU measures have an impact only within the EU? Or will they affect countries outside of the European Union?
Due to the nature of this Taxonomy, we are focusing more on the EU. But, even with Brexit, it is still expected that regulations apply in the UK as well. These specific measures are part of the package that the UK government has agreed to implement in domestic law to ease the path towards a potential free trade agreement. So, it is something that UK businesses should not neglect.
Who does the EU Taxonomy apply to?
The new regulations will shape the flow of investments and the practice across a range of financial professions:
- The first group affected is financial market participants, and issuers offering financial products. These include pension funds, insurance providers, private equity funds, and corporate and investment banks.
- The second is large companies – with more than 500 employees – that fall under the scope of the European Union (EU) Non-Financial Reporting Directive (NFRD).
- Thirdly, Member States on the EU setting public measures, standards or labels for green financial products or green bonds.
What data will you need to start disclosing?
To comply with the EU Taxonomy and its performance thresholds, companies will need to start disclosing their ‘sustainable investment objectives’. This will include the percentage of sustainable economic activity in terms of turnover, capital expenditure (CapEx) and, if applicable, operating expenses (OpEx).
For financial market participants offering financial products, where the relevant financial products contribute to one of the six ‘environmental objectives’, the entity must disclose:
- Details of the environmental objective(s) to which the underlying investment contributes; and
- A description of the extent to which the underlying investments are in sustainable economic activities. This should specify the share of investments in sustainable economic activities as a percentage of all investments selected in the financial product.
Does the EU Taxonomy in practice implicate a more complex reporting process?
Yes, it requires companies to truly understand what they need to achieve in terms of reporting. Our suggestion is to begin your preparations as early as possible and notify relevant ESG teams. Firstly familiarise yourself with the six environmental objectives set out in the EU Taxonomy Regulation. Secondly, work with your teams to gather relevant and reliable data on your chosen sustainable activities.
For more information on how Greenstone’s software can enable companies to meet multiple global sustainability reporting requirements, including the EU Taxonomy, contact us or sign up for a software demo.
More information on the EU Taxonomy can be found on our past webinar: "EU Taxonomy for sustainable finance - key impacts for companies and investors".
Last year, Greenstone published a blog covering the following frequently asked questions on the EU Taxonomy including:
- What criteria does an economic activity need to meet to be considered sustainable?
- What information are users of the Taxonomy required to disclose?
- Where and when should users of the Taxonomy disclose?
Read it here.