March 6, 2024 • Reading time: 6 Min
The EU taxonomy defines clear environmental targets for companies and helps them to implement them. With this regulation, the EU aims to make a significant contribution to environmental protection and increase transparency with regard to environmental investments. The regulation was introduced to set uniform standards for environmentally friendly investments and to promote a sustainable economy. Companies must already prepare for this now, as the EU taxonomy will be mandatory for all relevant players in the European Union. It is becoming increasingly important to report on how companies are achieving their environmental goals and what they are doing to achieve them. In this article, we explain the regulation and look at which companies are affected and when they are obliged to report. In this blog post, we would like to provide an overview of the taxonomy.
The EU Taxonomy Regulation was introduced to create a clear definition of "sustainable" in order to better promote investment in sustainable projects. It defines sustainability on the basis of clear criteria and plays an important role on the capital market. The regulation is intended to ensure that companies and investors can easily determine the level of sustainability of a company. The regulation aims to channel more funds into sustainable companies and technologies and thus support the European Union's Green Deal.
The main objective of the EU Taxonomy Regulation is to make Europe climate-neutral by 2050. Together with other regulations such as the Disclosure Regulation and the Corporate Sustainability Reporting Directive, it forms the basis for the EU's sustainable finance strategy. According to this regulation, companies must report on their business activities based on clearly defined criteria and state whether they meet environmental protection targets.
However, the EU taxonomy is not a seal of approval for green financial products and does not categorise companies as "good" or "bad". Rather, it focuses on economic activities and obliges companies to disclose relevant information. The aim is to reward and promote sustainable business practices and to create a standardised framework for investors, companies and member states. Theimplementation of the EU Taxonomy Regulation has already begun and will initially affect large companies that have to report in accordance with the Non-Financial Reporting Directive (NFRD). The regulation will then gradually be extended to other companies in order to channel capital flows towards sustainable investments.
Companies should act now, as sustainability reporting is already mandatory under the EU Taxonomy Regulation. Addressing the issue of sustainability at an early stage can prove to be a competitive advantage in the future. Companies must disclose certain "green" metrics, including the proportion of revenue from environmentally friendly activities and investments in environmentally friendly assets or processes.
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In order to achieve the EU's climate and energy targets, more must be invested in sustainable projects in future. A clear definition of the term "sustainable" is extremely important here. The Regulation - a common classification system for environmentally sustainable economic activities - was introduced for this purpose.
The EU taxonomy defines sustainability and plays an important role on the capital market. Both companies and investors see it as a benchmark. Based on clear criteria and metrics, investors can recognize whether a company can be classified as sustainable or not. This is intended to increase the flow of funds into sustainable companies and technologies and at the same time support the European Union's Green Deal. The aim of this financing plan for sustainable growth is for Europe to become climate-neutral by 2050.
Which investments and economic activities are really green and ecologically sensible? Which ones actually contribute to achieving climate targets? These questions must be answered transparently. The Taxonomy Regulation was therefore adopted at European level in June 2020. This states that only economic activities that make a significant contribution to environmental protection without significantly compromising other environmental goals are considered green.
The EU Taxonomy Regulation (EU Tax-VO), together with the Sustainable Finance Disclosure Regulation(SFDR) and the Corporate Sustainability Reporting Directive(CSRD), forms one of the three foundations of the EU's "Sustainable Finance Strategy". They are intended to help provide sustainable financial products and steer capital flows towards sustainable investments, particularly in companies with environmentally friendly business activities.
A system that shows how environmentally friendly business activities are. Companies must declare how "green" their economic activities and investments are based on defined criteria. To this end, they must determine their sales revenues, capital expenditure and operating costs in accordance with the taxonomy requirements and state them in the non-financial statement (NFS), which will form part of the future sustainability report.
The EU Taxonomy is not a seal of approval for green financial products. Labels for such products can make use of the taxonomy's classification system, as is the case with the EU Ecolabel and the planned EU Green Bond Standard. The taxonomy does not oblige investors to invest in green financial products, but to disclose relevant information. It also does not classify companies as "good" or "bad", but is aimed purely at economic activities. The regulation also does not establish a link to the financial performance of financial products.
The EU Taxonomy Regulation therefore establishes a framework for classifying "green" or "sustainable" economic activities within the EU in general. Previously, there was no clear definition of environmentally sustainable activities. The regulation now creates clear rules and framework conditions for the concept of sustainability in order to determine when a company is operating in a sustainable or environmentally friendly manner. This allows these companies to stand out positively from their competitors and should therefore benefit from increased investment. The legislation aims to reward and promote environmentally friendly business practices and technologies through a focus on investment.
In order to be considered a sustainable economic activity under the EU Taxonomy Regulation, it is not enough for a company to achieve at least one of the environmental objectives. None of the other objectives may be negatively affected either. An activity that aims to protect the climate but at the same time damages biodiversity cannot therefore be considered sustainable. To assess how environmentally friendly an economic activity is, four criteria based on the environmental objectives should be looked at.
The EU taxonomy will play a major role in channelling capital into environmentally friendly investments. It is therefore an important step towards achieving the overarching goal of a climate-neutral European Union by 2050.
Navigate safely through the requirements of the EU taxonomy: Our tool supports you in complying with the regulation and implementing the sustainability goals.
With the adoption of the Green Deal in 2019, the European Union laid the foundations for more sustainable investments, particularly in areas such as renewable energy, biodiversity and the circular economy. The long-term goal is to establish a climate-neutral economy in the EU by 2050. The aim is to achieve a reduction of 55% by 2030. In order to achieve these ambitious climate targets, the Green Deal provides for an investment plan of 1 trillion euros over the next 10 years. Despite this considerable sum, the EU is dependent on the private sector also contributing to achieving the Paris climate targets.
To ensure fair competitive conditions and legal certainty for all companies within the EU, the EU Taxonomy Regulation and the Sustainable Financial Services Regulation (SFDR) were introduced. Both laws pursue the objectives of the Green Deal and focus on the following areas:
The EU taxonomy lays the foundations for sustainability reporting with the Corporate Sustainability Reporting Directive. In order to ensure that data on climate, air pollution, biodiversity, water use and occupational safety is usable and meaningful for investors and other interest groups across all sectors, it must be comparable and reliable. Companies must document the impact of sustainability aspects on their financial situation and at the same time disclose how their business activities influence various sustainability aspects.
All companies subject to the Non-Financial Reporting Directive (NFRD) (see Sections 289b, 315b HGB) must publish information on whether their business activities comply with the regulation. Since the 2021 financial year, this has already affected capital market-oriented companies in Germany, which have been obliged to disclose non-financial information in accordance with the NFRD since 2017.
Since January 1, 2024, the NFRD has been replaced by the new Corporate Sustainability Reporting Directive. This means that a large number of companies are now required to report. Medium-sized companies in particular are often unaware that they too could be affected as early as the 2025 financial year. It is therefore crucial to deal with the requirements and implementation of the regulation and CSRD at an early stage.
Companies that already comply with the requirements of the NFRD (Non-Financial Reporting Directive) must meet their reporting obligations for the first time in 2024 with sustainability reporting in accordance with the CSRD requirements. The reporting obligation for large companies that fulfill two of the following three criteria will follow one year later:
When the CSRD reporting obligation comes into force, around 50,000 companies across the EU will have to provide detailed information on their sustainable business practices. Of the companies affected, around 15,000 are in Germany alone. In addition to the CSRD standards, larger companies will also be able to report on climate-related indicators such as turnover and investment and operating expenditure.
Reporting on sustainability in relation to the EU Taxonomy Regulation has been mandatory since the end of 2021. The EU has taken on a pioneering role, and other countries such as Canada and China are already developing their own taxonomy. Addressing this issue at an early stage and focusing on sustainability can prove to be a competitive advantage in all markets in the future.
Companies that are required to report are obliged to disclose and explain three "green" indicators in accordance with Article 8 of the EU Taxonomy Regulation. The first key figure concerns the proportion of revenue from the sale of products or services associated with environmentally friendly activities. They must also indicate how much they invest in capital and operating expenditure on assets or processes that are classified as environmentally friendly. It is important to note that investments that meet the taxonomy criteria can be independent of sales revenue.
The delegated acts set out the technical assessment criteria according to which certain economic activities can be classified as making a significant contribution to climate change mitigation and adaptation. The EU taxonomy is therefore important for businesses because it provides clear rules on what qualifies as an environmentally friendly activity. Companies can use the taxonomy to make a significant contribution to environmental targets and achieve them more effectively. The regulation also strengthens people's confidence in the market, which leads to more money flowing into environmentally friendly projects. It also promotes the financing of sustainable growth (sustainable finance) and the sustainable use of resources.
Companies should get to grips with the taxonomy at an early stage in order to understand the rules and prepare the necessary reports in good time. In this way, they can benefit from more sustainable business practices and position themselves as pioneers in environmental protection. The regulation is therefore not just a set of rules, but also an opportunity for companies to improve their sustainability strategy.
