How to Prepare a Business for the EU-Taxonomy

The European Union (EU) Taxonomy is a classification system for economic activities that contribute significantly to environmental objectives, aiming to provide a common language for sustainable finance (EU Technical Expert Group, 2020). As of 2021, the EU Taxonomy Regulation (EU) 2020/852 requires businesses to align their economic activities with the Taxonomy’s criteria (European Commission, 2020). This blog post discusses how businesses can prepare for the EU Taxonomy by understanding its objectives, determining its applicability, and implementing required changes, and especially for CSRD compliance.

Understanding the EU Taxonomy

The EU Taxonomy is designed to facilitate sustainable investment by identifying economic activities that contribute to the following six environmental objectives:

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems

To qualify under the EU Taxonomy, economic activities must meet specific technical screening criteria that demonstrate a significant contribution to at least one of the environmental objectives without causing significant harm to the others (EU Technical Expert Group, 2020). Additionally, businesses must comply with the “do no significant harm” (DNSH) principle and adhere to minimum social safeguards (European Commission, 2020).

Determining Applicability

The EU Taxonomy applies to the following entities (European Commission, 2020):

1. Financial market participants offering financial products in the EU
2. Large public-interest entities with more than 500 employees, as defined by the Non-Financial Reporting Directive (NFRD)

Businesses falling under these categories must assess their activities against the Taxonomy’s technical screening criteria and disclose the proportion of their revenues, capital expenditure (CapEx), and operational expenditure (OpEx) aligned with the Taxonomy (EU Technical Expert Group, 2020). Non-compliance may lead to fines, reputational damage, and reduced access to funding (Coppola et al., 2020).

The Six Objectives in Detail

Looking in detail at the six environmental objectives of the EU Taxonomy, we see there is clear structure and advice on the methodology. Nonetheless, there must be no doubt that compliance is a major undertaking for which external support is almost certain to be required.

1. Assessing Activities

Businesses should start by conducting a comprehensive assessment of their economic activities against the technical screening criteria for each environmental objective. This process involves identifying which activities contribute to the objectives, determining the extent of their contributions, and ensuring they meet the DNSH principle and minimum social safeguards.

2. Gap Analysis and Action Plan

After assessing their activities, businesses should perform a gap analysis to identify areas where they do not meet the Taxonomy’s criteria. This involves evaluating the organization’s current sustainability practices, policies, and reporting systems. Based on the findings, businesses should develop an action plan to address identified gaps, improve performance, and align with the Taxonomy’s requirements.

3. Enhancing Data Collection and Reporting

Implementing the EU Taxonomy requires businesses to have robust data collection and reporting systems. This includes gathering and managing relevant data on environmental performance, DNSH assessment, and social safeguards. Businesses should invest in systems and processes to ensure accurate, consistent, and timely data collection, enabling them to demonstrate compliance with the Taxonomy\’s requirements.

4. Engaging Stakeholders

Aligning with the EU Taxonomy involves engaging with various stakeholders, including investors, regulators, suppliers, and customers. Businesses should communicate their commitment to the Taxonomy, discuss the implications of their alignment, and seek feedback from stakeholders to improve their sustainability practices. This engagement can help build trust, ensure transparency, and attract sustainable investment.

5. Training and Capacity Building

Preparing for the EU Taxonomy requires developing the necessary skills and knowledge within the organisation. Businesses should provide training and capacity-building programs for employees, focusing on understanding the Taxonomy’s objectives, criteria, and reporting requirements. This will enable employees to contribute effectively to the organisation’s efforts to align with the Taxonomy and achieve its sustainability goals.

6. Monitoring and Continuous Improvement

Once businesses have implemented the necessary changes, they must establish ongoing monitoring and continuous improvement processes. This involves tracking performance against the Taxonomy’s criteria, identifying areas for improvement, and updating policies and practices accordingly. Regular monitoring ensures compliance, enables businesses to adapt to evolving requirements, and demonstrates a commitment to sustainable development.

Conclusions

The EU Taxonomy represents a critical tool for promoting sustainable investment and ensuring a greener future. Businesses can prepare for the EU Taxonomy by understanding its objectives and applicability, assessing their activities against the technical screening criteria, and implementing changes to align with its requirements. By doing so, businesses can demonstrate their commitment to sustainability, attract sustainable investment, and contribute to the EU’s ambitious environmental objectives.