How to prepare and progress towards EU Taxonomy alignment in 2023

The EU Taxonomy: Differentiating between eligibility and alignment

The EU Taxonomy is a classification system for environmentally sustainable activities, that aims to avoid greenwashing and help investors make better-informed decisions regarding 6 environmental objectives:

EU Taxonomy Environmental Objectives

The EU Taxonomy differentiates between eligible and aligned activities. An economic activity is classified as eligible if the activity description is covered by the published EU Taxonomy Delegated Acts. For an economic activity to be aligned with the EU Taxonomy, full compliance is required with the following criteria:

  • the substantial contribution criteria as set out per economic activity
  • determining that each eligible economic activity ‘’does no significant harm’’ against the remaining 5 objectives
  • criteria of the minimum social safeguards are met

Determining and calculating EU Taxonomy alignment disclosures entails a substantial amount of effort and support from various internal stakeholders such as reporting specialists (sustainability & financial), human rights specialists, and subject matter experts.

Below we provide you with an overview of updated requirements, estimated timelines for your organization, and how we at Sustainalize/ERM can help guide you through the complexity of reporting in accordance with the EU Taxonomy.

Estimated timelines and developments on EU Taxonomy reporting requirements

During the FY 2021 reporting period companies were only required to disclose on their eligibility against climate change mitigation (CCM) and climate change adaptation (CCA) objectives. Based on the latest draft commission notices issued in December 2022, companies will only be required to disclose their eligibility and alignment KPIs against CCM and CCA objectives for the FY 2022 reporting period.

Looking ahead at the FY 2023 reporting period, it is still to be determined whether the remaining four environmental objectives will be adopted and transposed into a legally binding delegated act by the European Commission (EC). Based on the adoption timeline of the four remaining annexes, it is plausible to assume that the EC will follow a similar ‘’phase-in’’ approach as was done with the CCM and CCA objectives. We therefore expect that companies will have to report on their eligibility against all objectives and alignment against CCM and CCA for the FY 2023 reporting period.

Authors
Ryno Roux

Ryno Roux

Senior Consultant, Sustainalize

Cedric Bodart

Cedric Bodart

Consultant, Sustainalize

Aidan Geel

Aidan Geel

Consultant, Sustainalize

Don’t hesitate to reach out to our colleagues if you need any help or assistance in the process.

Published on: 9 January 2023

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EU Taxonomy Alignment Estimated Timeline

Timelines are based on assumptions of the latest information and news received on the EU Taxonomy regulations.

Even though the newly approved update of the CSRD will request a larger number of companies to disclose against the EU Taxonomy, this timeline doesn’t currently impact these companies. In fact, companies currently not in scope for the NFRD won’t have to report against CSRD and EU Taxonomy requirements until the FY 2026 reporting period over FY 2025 data.

In addition, and in line with multiple international guidelines, EU legislations and the CSRD, the Platform on Sustainable Finance has recently published its advice on minimum social safeguards, regarding human rights, bribery and corruption, taxation, and fair compensation. Companies falling under the scope of EU Taxonomy will be requested to disclose against these minimum social safeguards (MSS) when determining their alignment. Further additional information on the minimum social safeguards is expected to be published in the upcoming months. We also share more of the minimum social safeguards in our blog about Human Rights due diligence legislation.

How Sustainalize/ERM can help you navigate through this timeline

The extensive list of criteria set out by the EU Taxonomy, combined with the anticipated updates, makes it difficult for companies to understand where to start and how to assess alignment with the EU Taxonomy. The general complexity of alignment might even encourage companies to adopt a “wait and see” attitude, thereby potentially losing out on the first mover advantage.

Due to the developments and complexity revolving around the EU Taxonomy, we highly encourage organizations to take a pragmatic approach by:

  • creating internal knowledge and awareness on the topic of Taxonomy
  • establishing ownership via identification of which internal stakeholders to involve for EU Taxonomy data gathering and reporting purposes
  • linking the EU Taxonomy to your corporate strategy
  • performing eligibility and alignment analysis
  • performing ‘’pre-alignment’’ analysis against the four draft environmental objectives to determine possible alignment for 2023 reporting data
  • performing a minimum social safeguards gap analysis
  • carrying out a human rights due diligence
  • conducting a physical climate risk assessment

Our team at Sustainalize/ERM has vast experience advising companies across multiple sectors and industries through the complex regulatory environment of the EU Taxonomy. Please feel free to get in touch with one of our experts if you would like to discuss the EU Taxonomy and its implications for your company.

For further reading about the EU Taxonomy, we invite you to have a look at our recently published research report ‘Over Two Years with the EU Taxonomy‘, our latest expert briefing.

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