Understanding the EU Taxonomy is essential for businesses aiming for sustainability and regulatory compliance. In this interview, Joana Belo Pereira, Product Manager at Factlines, shares expert insights into the EUTaxonomy's role in sustainable finance, its impact on businesses, and how companies can integrate it into their ESG initiatives.
Gain practical insights into EU Taxonomy compliance, reporting strategies, and how businesses can align with sustainability and ESG goals.
-Joana, what is the EU Taxonomy and why is it important for businesses?
TheEU taxonomy is a cornerstone of the EU's sustainable finance framework and an important market transparency tool. It helps re-direct investments towards those economic activities most needed to accelerate the transition to the decarbonisation of the economy, in line with the European Green Deal objectives. The EU Taxonomy is a classification system that puts forward environmental criteria for economic activities and social criteria for companies. The fulfilment of these objectives will align the EU economy with a net zero trajectory by 2050 and will touch on broader environmental goals (such as pollution reduction and protection for biodiversity).
-Which companies must comply with the EU Taxonomy today?
As with any piece of legislation, EU Taxonomy has defined a specific scope of application. This scope will evolve in the next few years, meaning that even companies that do not have a mandatory reporting obligation today might find themselves falling under the scope in a couple of years’ time.
At the moment, assessing EU Taxonomy on an annual basis is mandatory for all listed companies in the EU. Companies that fulfil two out of the three following three criteria: to be considered a large company in the EU (defined as having >500 full-time employees in the previous year), a revenue of>40 million EUR and a balance sheet of >20 million EUR. It is important to note that any company has the possibility of conducting their Taxonomy assessment on a voluntary basis.
-Where should companies currently report their EU Taxonomy assessments?
While the intention is to have a centralised body where all Taxonomy assessments will be submitted, at present, this body has not been created yet. Nevertheless,companies for whom Taxonomy is mandatory must disclose the results of their assessment alongside other annual reports. There is some flexibility in terms of filing a separate Taxonomy report or adding it to their Sustainability orAnnual Report.
-Which businesses are impacted by the EUTaxonomy regulations?
Both financial institutions(such as banks or insurers) and non-financial actors (privately held companies, as well as listed companies) may fall within the scope of the EU Taxonomy.Government bodies are currently out of scope.
-Does the EU Taxonomy apply to companies outside the EU?
While the primary jurisdiction of the EU Taxonomy Regulation is the European Union, it may be the case that companies outside of the Union will also be within scope. This may be the caseif a company’s EU subsidiary(ies) are large enough to fulfil two out of the three qualification criteria. Conversely, if a company’s HQ is in Union territory and listed in the stock market, its daughter companies, even if based overseas, would come under the scope of the Regulation.
-What are the benefits of aligning with the EUTaxonomy for businesses?
At the end of a Taxonomy assessment, businesses should, at a minimum, understand if their key economic activities are within the scope of the Regulation, and whether they are aligned or not with the specific technical criteria. In order to do that, they need togo through a process of assessing their double materiality (finding which activities are both financially and impact fully relevant to their business). In terms of benefits, undertakings that can showcase impressing alignment scores year on year may find it easier and cheaper to have raise capital or access bank loans.
-How can businesses navigate and understand EUTaxonomy requirements?
While a DIY approach to EUTaxonomy is entirely possible (a lot can be inferred from the EC’s (EuropeanCommission) Taxonomy Compass, for example),most organisaations subject to mandatory reporting requirements find that the process of structuring, compiling data, and going through the assessment’s requirements is greatly facilitated by software. The EU Taxonomy representsaround 24,000 pages of core legislation, referenced legislation, FAQs,Technical Annexes and supporting documentation, so it is not at all uncommon to see businesses resorting to external expertise in a bid to make reporting workless painful.
-How should businesses approach the assessment of their alignment with EU Taxonomy and what strategies can the yemploy to simplify the reporting process?
Prior to checking their alignment, businesses must start by checking if they are in scope of the Regulation. After that, a Double Materiality assessment will be required, to identify which activities are relevant for the assessment. Once a list of activities has been agreed upon, businesses need to undergo a process of Technical Screening to verify whether their activities are aligned, or simply eligible. Finally, businesses will need to input the required FinancialKPIs (Turnover, CaPEx and OpEx) in order to get a measure of they alignment percentage.
Asa Regulation in force with a time horizon stretching at least until 2050, theEU Taxonomy is not going anywhere anytime soon. Companies already in scope of the Regulation can either face this reality as a regular annual reporting exercise, or they might choose to leverage this fact as an opportunity. Part of that opportunity can be gained by streamlining the reporting process. Reporting can be streamlined by following the same pre-defined process year on year, by creating data sanity checks and by having an audit trail in place.
-What are the main challenges in complying with the EU Taxonomy?
Taxonomy reporting can be a daunting challenge for companies of all sizes. The complexity involved, the need for centralised documentation, and the intricate involvement of various stakeholders make it a formidable task. One particularly thorny topic is the ambiguity written into several provisions of the EU Taxonomy Regulation itself.My recommendation for dealing with the challenges is to acquire expertise in the field if you do not possess it yourself, spend time understanding what kind of data is needed to be able to report on the requirements, and reduce the very time-consuming and manual processes with optimised software.
-How does Factlines' software simplify EUTaxonomy reporting?
Factlines' software reduces manual tasks and reliance on cumbersome spreadsheets. Users can easily access past entries and documents in consecutive assessment years to improve accuracy and streamline the reporting process. Businesses that have reported in the past, and who know how frustrating this can be, will have a very different reporting experience using this software.
-What is your best advice for businesses preparing for EU Taxonomy compliance?
There are many things I could mention here, but I recommend that those responsible start early to understand what data deficiencies the business has. Then, they can make a plan to cover the shortfalls in order to report on time. For certain industries, such asConstruction, the EU taxonomy can also be used to pre-qualify new projects.Therefore, I would read up on this or ask us for advice on how best to approach the opportunity.
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