As part of the European Green Deal, the EU Taxonomy Regulation (2020/852/EU) creates a framework for the concept of sustainability, exactly defining when a company or enterprise is operating sustainably.
Companies required to report on the EU Taxonomy need to follow a 4-step evaluation and disclosure process: From identifying the economic activities to classifying their eligibilities, calculating their turnover, CapEx, and Opex, and finally reporting them. Let's take two examples to illustrate what this complex process means in practice.
First EU Taxonomy example: a cement company renovates and adapts two plants
Let’s say that a cement company is renovating and adapting two plants counting turnover and capital expenditure as taxonomy-aligned.
The company in the cement industry wants to renovate and adapt two of its plants that contribute 50% of its turnover. The renovation of cement facilities includes retrofitting to reach high energy-efficiency levels, increasing the use of blended materials to reduce the clinker-to-cement ratio to below 0.65, and the use of alternative clinkers and binders. The cement production facilities are expected to achieve thermal energy intensity of approximately 3 GJ/t clinker and carbon intensities in line with the taxonomy.
A climate risk assessment of the facilities based on climate data indicates that facilities are vulnerable to flooding. Your company has decided to increase the capacity of the drainage systems to make them more resilient to flooding. The costs of adapting the facilities are valued at 5M EUR per facility.
The overall renovation of the facilities amounts to 500M EUR, which represents 80% of the company’s capital expenditures. The company seeks to raise funds in the capital market and issues a green bond based on the EU green bond standard, which includes compliance with DNSH criteria for both mitigation and adaptation. The bond will therefore be taxonomy-aligned.
Once the works related to climate change mitigation are finalized, your company could claim all turnover generated from those two facilities (50% of your company’s turnover), as well as 80% of its capital expenditures, are taxonomy-aligned.
Second EU Taxonomy example: a corporate turns its headquarters climate-resilient
Another scenario could be a corporation that wants to adapt its headquarters to make its entire operations climate-resilient (i.e., they want to count the corresponding capital expenditure as taxonomy-aligned). First and foremost, it is important to note that for the headquarters renovation to be EU Taxonomy-aligned, none of its facilities can serve the purpose of extracting, storing, transporting, or manufacturing fossil fuels.
Moving on, the company first conducts a climate risk assessment to analyze potential climate change impacts on its headquarters and other company buildings. The assessment is based on climate data and shows that flooding and extreme heat are the main risks to the headquarters, while also some of the facilities are vulnerable to flooding.
The company then identifies several measures to significantly reduce the identified risk. Among them are measures to provide passive cooling and increase the capacity of drainage systems. The action plan also includes an impact assessment to ensure that the measures to be implemented are in line with local and regional adaptation efforts and comply with DNSH criteria for buildings.
The company determines that the total cost of the proposed changes is EUR 50 million, for which it seeks several loans over a three-year period. The plan starts with the adaptation of its headquarters with estimated costs of EUR 10 million—the subject of the first loan. This first loan may be followed by further loans or, for example, a EUR 40 million bond in a private placement.
Each of the loans is aligned with the taxonomy criteria, even though one of the loans (e.g., the first loan of 10M EUR) does not in itself reduce all material climate risks to your company's operations; it is a necessary measure in a broader, time-bound plan to adjust your company's overall assets. The lending bank could bundle the loans and thus advertise the EUR 50 million as green and 100% taxonomy compliant.