Now that the summer period is behind us, many organisations face an interesting challenge, i.e. to ensure that they are ready for the EU taxonomy. The first part of this European classification system which defines what counts as a sustainable economic activity, enters into force on 1 January 2022. This will have major consequences for the 2021 annual reports of those organisations that provide financial products and public interest companies with more than 500 employees.
While the end of the year may still seem a long way off, it is important that organisations start preparing to be taxonomy compliant now. This is because those new European regulations will directly impact sustainability reporting in annual reports for 2021. In practice, however, I have noticed that many organisations either still lack a sense of urgency or are not quite sure what they need to do. To address this I am setting out a step-by-step plan in this blog. However, I’d like to begin by taking a look at the idea behind the EU taxonomy.
Under the Paris Agreement, which was signed some six years ago, two hundred countries agreed to work towards ending global warming. In addition, the European Union is committed to becoming climate neutral in 2050. In order to achieve these objectives, the EU launched an action plan for financing sustainable growth in March 2018. This action plan is part of the European Green Deal which aims to green the European economy. According to the European Commission, the financial system holds the key to economic greening and sustainability.
The three most important objectives of the EU action plan are as follows:
A key step in achieving these goals is the establishment of a uniform classification system or ‘taxonomy’. With this system, the EU intends to help organisations identify sustainable activities and provide guidance on how to qualify these activities in their reports. An economic activity that meets the taxonomy screening criteria results in greater transparency and better comparison options. The EU also hopes this system will reduce so-called ‘greenwashing’.
The EU taxonomy must first be implemented by organisations in the financial sector and then by public interest enterprises with more than 500 employees, that are required to publish non-financial information. EU member states must also use the taxonomy when determining if certain financial products and corporate bonds can be considered sustainable or not.
The taxonomy currently only focuses on environmental criteria objectives. In due course, however, there will also be a classification for sustainability with regard to social and governance criteria, and a ‘brown’ taxonomy for activities that seriously compromise environmental objectives. The current taxonomy has six environmental objectives:
So far criteria have only been developed for the first two objectives to assess whether an economic activity is in line with the taxonomy. The criteria for the other objectives will be announced in the course of 2022. From 1 January 2023, non-financial enterprises will also be required to report how large a share of their revenues are derived from activities that are in line with the EU taxonomy for the other four objectives.
The first disclosure requirements will come into effect from 1 January 2022. This means that after this date all periodic reports published by organisations that are covered by the taxonomy regulation will need to include the information required under the taxonomy. These organisations should actually already be preparing themselves for this. If not, they should start now. To determine how exactly to move forward it is important to follow the steps below:
Find out whether you are required to report in accordance with the new scheme and whether it is applicable to your organisation. This is still not completely clear to all organisations.
If you are required to observe the EU taxonomy in your reports, it is important to be clear about which activities this applies to. Make sure you are clear about this.
If you know what the activities are, you will need to collect data about them. Find out which data are available and if there are any ‘gaps’ are. Also investigate whether the data are reliable and what internal controls are applied.
Make sure that you are able to assess and analyse the collected information. An analysis process will enable you to detect certain trends and decide which information is valuable or not.
Perhaps the most important step is ensuring your people understand the importance of the process and including them in it. A sustainability policy is not a pet project of the executive board, but something that must be supported by everyone at the organisation. Otherwise it will be doomed to fail.
While the information that you must provide on 2021 may be limited in nature, the first phase of the EU taxonomy is just a signal for the mandatory publication of far more sustainability information that is to come. In the future, investors, social organisations and many other stakeholders will look at this information with suspicion and compare it.
Look further below the photo for the road to the new EU taxonomy.
Publication of information on the final four environmental objectives:
● sustainable use and protection of water and marine resources;
● the transition to a circular economy;
● preventing and tackling pollution;
● protecting and restoring biodiversity and ecosystems.
First part of the EU taxonomy comes into effect: in their 2021 annual reports, organisations will be required to report on the share of the revenues that come from activities that are in line with the first two environmental objectives: mitigating climate change and adapting to climate change.
Publication of the second part of the EU taxonomy.
Second part of the EU taxonomy comes into effect: in their annual report, organisations must report on the portion of the revenues that come from activities in line with the six environmental objectives.
To create value through ESG (environmental, social, and governance), you need to put the theory aside and develop a concrete and practical plan to get started.
Being successful is not just about finance, disclosure, climate change or diversity. It is about embedding all of these - and other - principles in your strategy and activities. It is essential to embed ESG factors into your company's strategy and transformation, as well as into reporting and assurance to ensure a successful sustainable future.