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The EU taxonomy results in new reporting obligations for companies on sustainability. For large capital market-oriented companies with more than 500 employees that are not financial companies*, this means that from 1 January 2022 they will have to disclose in their non-financial statement the share of the key figures revenue, capital expenditure and operating expenditure that is associated with environmentally sustainable economic activities within the meaning of the EU taxonomy. Furthermore, further explanatory and concretising statements on the three key figures are expected, such as explanations on the determination of the taxonomy-compliant activities and the calculation methodology of the three key figures.

The EU Taxonomy is a measure set out in the EU Sustainable Finance Action Plan and codified in Regulation 2020/852 (Taxonomy Regulation). The aim of the action plan is to channel capital flows into environmentally sustainable activities. Prerequisites for this are, among other things, that there is a uniform understanding of what counts as an "environmentally sustainable activity" and that verifiable criteria are created that allow an activity to be classified as environmentally sustainable. The EU taxonomy creates these prerequisites.

Ecologically sustainable economic activities and environmental goals

The Taxonomy Regulation defines the criteria for environmentally sustainable economic activities:

  1. The economic activity makes a significant contribution to achieving one or more of the designated environmental objectives.
  2. The activity does not compromise one or more of the other environmental objectives.
  3. The activity is carried out in compliance with mind-set protection (e.g. the OECD Guidelines for Multinational Enterprises, the United Nations Guiding Principles on Business and Human Rights and the International Labour Organisation Labour Standards).

The following six environmental objectives are mentioned in the Taxonomy Regulation:

  • Climate protection
  • Adaptation to climate change
  • 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

These criteria are specified by further delegated acts and references to other EU regulations and EU directives. 

The EU taxonomy creates new reporting obligations for business entities with regard to sustainability. For large publicly traded companies that have more than 500 employees and are not financial institutions,* this means that, as of 1 January 2022, they will be required to report, in their non-financial statement, the proportion of the metrics for turnover, capital expenditure and operating expenditure associated with environmentally sustainable economic activities for the purposes of the EU taxonomy. Further explanatory and specific statements on the three key metrics are expected, such as information on determining taxonomy-compliant activities and the calculation methodology of the three key metrics.

The EU taxonomy is a measure set out in the EU "Sustainable Finance" Action Plan that has been codified in Regulation 2020/852 (Taxonomy Regulation). The Action Plan’s objective is to direct cash flows into environmentally sustainable activities. The foundation for this includes, among other things, the existence of a common understanding of what is considered to be “environmentally sustainable activity” and the creation of verifiable criteria that enable an activity to be classified as environmentally sustainable. The EU taxonomy creates this foundation.

Environmentally sustainable economic activities and environmental targets

The Taxonomy Regulation defines the following as criteria for environmentally sustainable economic activities:

  1. Economic activity makes a significant contribution to the achievement of one or more of the named environmental goals
  2. The activity does not affect one or more of the other environmental objectives
  3. The activity is carried out in compliance with minimum protection standards (e.g. the OECD Guidelines for Multi-National Enterprises, the United Nations Guiding Principles on Business and Human Rights and the Labor Law Standards of the International Labor Organization).

The following six environmental targets are stated in the Taxonomy Regulation:

  1. Climate protection
  2. Adaptation to climate change
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy
  5. Protection and restoration of biodiversity and ecosystems

These criteria are specified by further delegated acts of law and references to other EU regulations and EU directives.

Identifying taxonomy-compliant economic activities

Before it is possible to determine the proportion of turnover, capital expenditure and operating expenditure attributable to sustainable activities, the activities of the business entity that are deemed environmentally sustainable for the purposes of the EU taxonomy must first be identified. Firstly, the activities must be identified that meet the relevant requirements for the EU taxonomy (currently: those contributing to the reduction of CO2 emissions). Then, there must be a check to see whether these activities also meet the evaluation criteria for taxonomy-compliant activities (substantial contribution to the environmental targets, no adverse effect on other environmental targets and compliance with basic social protection). Ultimately, the taxonomy-compliant activities are identified that are included in the calculation of the key financial metrics, i.e. the proportion of turnover, capital expenditure and operating expenditure.

Here, the ever-increasing linkage of financial and non-financial information in corporate reporting is evident: While sustainability departments will more likely accommodate the identification of taxonomy-compliant activities, corporate accounting will handle the calculation basis for the key metrics.

What needs to be done now?

Affected business entities should first conduct an analysis of their business activities with respect to whether they are deemed relevant to taxonomy and in compliance under the EU regulations. Furthermore, additional dimensions, such as systems, processes and the control landscape, must be taken into account in the analysis for subsequent reporting of the financial metrics.

Efficient reporting and safeguarding target assurance requires a holistic approach to implementation involving all key stakeholders.

With our EU Taxonomy Task Force, we would be pleased to support you in implementing the new requirements.

* Additional special requirements apply to financial institutions.

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