EU Taxonomy: All you need to know. This tool drives transparency and real green investments. But how do you apply it? Who needs to stand up and take notice? And what is the link with other ESG legislation such as the CSRD?
The EU Taxonomy came into effect on 1 January 2022 and is only one of several tools established by the European Union to meet the 2050 climate goals, in line with the Green Deal. It provides a framework for companies to report on their environmental investments. By driving transparency and countering greenwashing, it encourages investors to make informed decisions and actually put their capital into green activities – accelerating the transition to a sustainable economy.
Who does the EU Taxonomy apply to?
At this point in time, parties that are subject to the reporting obligation are all large companies and financial market participants that also have to report under the Non-Financial Reporting Directive (NFRD), Sustainable Finance Disclosure Regulations (SFDR) and/or Corporate Sustainability Reporting Directive (CSRD). These include, for example, companies with more than 500 employees, a balance sheet total of more than €20 million and/or more than €40 million net turnover. Nevertheless, all construction and real estate companies will be affected by this to some extent, as they operate within the same chain as companies and institutions with reporting obligations.
3 critical criteria and specific thresholds
Three criteria determine whether an investment can be classified as sustainable in the EU Taxonomy:
- A substantial contribution to at least 1 of 6 climate goals:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and maritime resources
- Circular economy transition
- Pollution prevention
- Ecosystems: Protection and Restoration
- No significant harm to other 5 climate goals
- Meeting minimum safeguards on labour relations and human rights
The challenge is that these criteria risk being open to interpretation. This is why each country has drawn up specific limits tailored to the local measurement tools. Let’s consider how the Netherlands and Italy localise the EU Taxonomy Guide. In the Netherlands, the DGBC uses the local BENG tool , which measures near-energy-neutral buildings, to set limits. Meanwhile, Italy uses the Carbon Risk Real Estate Monitor (CRREM) to do so.
These locally defined limits form the basis of the EU Taxonomy reports. Any investments which contribute to these parameters can be classified as ‘sustainable’, with the added complexity that reporting standards also vary by country.
Being known as a green leader in the market
Companies are not required to report on all parts of the EU Taxonomy, however there are interesting reputational benefits to consider:
- Access to green finance
- Recognition as a green business
- The ability to be part of green funds or investments
- Being prepared for future legislation
In addition, the EU Taxonomy contains guidelines enshrined in certain local legislation. A clear example in the Netherlands is the Building Automation and Control System (BACS) which must meet technical requirements by 2026.
EU Taxonomy in 4 steps
To comply with the EU Taxonomy, you can go through the following steps:
- First, map the sustainable investments the company has made in the past year.
- Check whether these investments are covered by the EU Taxonomy and determine which of the three chapters they correspond to. Next, calculate the percentage of green investments within your CAPEX and OPEX.
- Examine to what extent your company is acting within the limits of the local implementation of the EU Taxonomy. If you do not meet the limits, record what investments you will make in the future to reach the target.
- Write down the results of the above steps in three sections: climate targets, no significant damage and minimal safeguards. This does not necessarily have to be in a report, but can also be in the form of a leaflet or webpage, for example.
At Deerns, we apply the same steps to align our clients’ reporting with the EU Taxonomy. This provides insight and transparency into the company’s sustainable investments, and uncovers opportunities for future green developments.
Large and listed companies are also required to report from the 2024 financial year onwards from the Corporate Sustainability Reporting Directive (CSRD), which includes S (people and society) and G (governance) in addition to environmental aspects (E). This topic will be covered in detail in the next article in this series.
