The EU Taxonomy regulation outlines a clear definition of when a company is operating sustainably, providing a competitive advantage to honestly sustainable businesses. Because it will be easier for investors and the public to differentiate between a company that is acting or only pretending to be sustainable. However, companies that are required to report according to the EU Taxonomy must go through a complex reporting process. The EU Taxonomy regulation has defined various criteria to determine whether an economic activity can be classified as sustainable.
For each economic activity, a 4-step process must be followed.
Step 1: Identify the business activities of your company
To identify the business activities, the first step is to review the entire external product and service portfolio. However, not only the external core activities but also activities from all internal projects need to be analyzed. In contrast to external activities, purely internal activities in practice often include mobility (e.g., a company's vehicle fleet) and real estate (e.g., investments in non-production buildings).
|You want to know how to identify all economic activities in detail? View the entire process and three practical tips for identifying business activities in the article How to identify your EU Taxonomy business activities.
Step 2: Classify each economic activity as taxonomy-aligned
After identifying a company’s business activities, each of these activities must go through a multistage process to find out if they are considered taxonomy-eligible as well as taxonomy-aligned. To consider an economic activity not only eligible but also aligned, a company must confirm that it complies with the Technical Screening Criteria (TSC). This means an economic activity must make a significant contribution to at least one of the six environmental objectives, do no significant harm (DNSH) to any of the remaining environmental objectives, and meet the minimum safeguards based on certain global human rights standards and frameworks.
1. Check if it is associated with a taxonomy activity
A business activity can be called an eligible economic activity if it can be associated with a taxonomy activity. The economic activities that are eligible for screening are defined in the delegated acts specifying the Technical Screening Criteria for the environmental objectives. The EU Taxonomy activities do have a link to the NACE code structure, or officially the “Statistical Classification of Economic Activities in the European Community.” This is the industry standard classification of economic activities in the European Union and can be used to help identify eligible activities.
2. Check if it makes a substantial contribution to one of the six environmental objectives
In the EU Taxonomy, the idea of sustainability is distilled into six different environmental objectives. A company’s business activity must at least contribute to one of the following objectives:
Climate change mitigation
Climate change adaptation
Sustainable use and protection of water and marine resources
Transition to a circular economy
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems
3. Check if it does no significant harm (DNSH) to any other objectives
To be classified as sustainable according to the EU Taxonomy regulation, a company’s economic activity must contribute to at least one environmental objective but also must not intrude on the remaining five. For example, a business activity that aims to reduce CO2 emissions but at the same time has a negative impact on biodiversity cannot be classified as sustainable.
4. Check if it meets the minimum safeguards
The Minimum Safeguards ensure that companies engaged in sustainable activities comply with certain standards relating to human and labor rights. A company needs to ensure compliance with the OECD Guidelines, the UN Guiding Principles, the International Labour Organization (ILO), and the Human Rights Charter to not have a negative social impact.
Step 3: Calculate financial KPIs
Calculate turnover, CapEx, and OpEx
After a company has evaluated its economic activities and determined its eligibility and alignment status, it must disclose special KPIs of each qualified economic activity.
This is done by focusing on the three following KPIs:
Turnover share that is aligned & eligible with EU Taxonomy
Capital expenditures (CapEx) share that is aligned & eligible with EU Taxonomy
Operating expenditures (OpEx) share that is aligned & eligible with EU Taxonomy
The calculation of these KPIs needs to be paid special attention to. While calculating the KPIs, a company also needs to keep in mind using the same accounting principles that apply to its financial statements.
Disclose additional qualitative information
In addition to the three KPIs, a company shall disclose accompanying qualitative information about the calculation and key elements of KPIs outlined in the Disclosures Delegated Act (2021/2178/EU). This includes a company’s:
> i.e., how a company calculated its turnover, CapEx, and OpEx and how it allocated each KPI to the corresponding economic activities
Assessment of compliance with the EU Taxonomy regulation
> i.e., how a company determined the eligibility and alignment of each economic activity in compliance with the technical criteria and how it avoided double counting
Contextual information about turnover, CapEx, and OpEx KPI
> i.e., how a company broke down each of the KPIs, including the CapEx plan and any changes
Step 4: Report the taxonomy-aligned economic activities
After a company has determined the EU Taxonomy-aligned share of each KPI and compiled the qualitative information, the last step is to craft the final report. All taxonomy-aligned activities in KPIs and all additional info need to be included. The report shall be structured using the templates presented in Annex II of the Disclosures Delegated Act.
Are you overwhelmed by the scope and complexity of the EU taxonomy reporting process? Envoria supports you and your company in implementing a reporting process and makes collecting, analyzing, and reporting data – thanks to the all-in-one software solution – easy and efficient. Book a demo today or request any other support via our contact form.