How to simplify EU Taxonomy reporting and strengthen supplier compliance

Understanding the EU Taxonomy is vital for businesses seeking sustainability and regulatory compliance. In this interview, Joana Belo Pereira, Product Manager at Factlines, provides expert insights into the EU Taxonomy’s role in sustainable finance, its influence on businesses, and how companies can incorporate it into their ESG initiatives. Gain practical advice on EU Taxonomy compliance, reporting strategies, and how businesses can align with sustainability and ESG objectives.

Joana, what is the EU Taxonomy and why is it significant for businesses?‍

- The EU taxonomy is a fundamental part of the EU's sustainable finance framework and a key tool for market transparency. It directs investments towards the most crucial economic activities to speed up the transition to a decarbonised economy, in line with the European Green Deal objectives. The EU Taxonomy is a classification system that sets out environmental criteria for economic activities and social criteria for companies. Achieving these objectives will help align the EU economy with a net zero trajectory by 2050 and address broader environmental aims, such as pollution reduction and biodiversity protection.

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Which companies are currently required to comply with the EU Taxonomy?‍

- As with any piece of legislation, the EU Taxonomy has a specific scope of application. This scope will develop over the coming years, meaning that even companies without a mandatory reporting obligation today might fall within the scope in the future.
At present, it is mandatory for all listed companies in the EU to assess the EU Taxonomy annually. Companies that meet at least two of the following three criteria—being considered a large company in the EU (defined as having more than 500 full-time employees in the previous year), generating revenue of over 40 million EUR, and having a balance sheet exceeding 20 million EUR—are subject to this requirement. It is important to note that any company may choose to conduct their Taxonomy assessment voluntarily.

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Where should companies currently report their EU Taxonomy assessments? ‍

-While the aim is to establish a centralised body for all Taxonomy assessments, this body has not yet been created. Nonetheless, companies for which Taxonomy is mandatory must disclose the results of their assessment alongside other annual reports. There is some flexibility in whether they file a separate Taxonomy report or include it in their Sustainability or Annual Report.

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Which businesses are affected by the EU Taxonomy regulations?‍

-Both financial institutions (such as banks or insurers) and non-financial entities (privately held companies, as well as listed companies) may fall within the scope of the EU Taxonomy. Government bodies are currently out of scope.

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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 also apply to companies outside the Union. This can be the case if a company’s EU subsidiary(ies) are large enough to meet two out of three qualification criteria. Conversely, if a company’s headquarters are in Union territory and it is listed on the stock market, its daughter companies, even if based overseas, would fall under the scope of the Regulation.

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What are the benefits of aligning with the EU Taxonomy for businesses?‍

-At the end of a Taxonomy assessment, businesses should, at a minimum, understand if their key economic activities fall within the scope of the Regulation and whether they are aligned with the specific technical criteria. To do this, they need to go through a process of assessing their double materiality, which involves identifying activities that are both financially and impactfully relevant to their business. In terms of benefits, undertakings that can demonstrate impressive alignment scores year after year may find it easier and cheaper to raise capital or access bank loans.

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How can businesses navigate and understand EU Taxonomy requirements?‍

-While a DIY approach to EU Taxonomy is entirely possible (a lot can be inferred from the EC’s (European Commission) Taxonomy Compass, for example), most organisations subject to mandatory reporting requirements find that the process of structuring, compiling data, and meeting the assessment’s requirements is greatly facilitated by software. The EU Taxonomy comprises around 24,000 pages of core legislation, referenced legislation, FAQs, Technical Annexes, and supporting documentation, so it is not unusual to see businesses engaging external expertise to make the reporting process less burdensome.

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How should businesses approach the assessment of their alignment with EU Taxonomy, and what strategies can they employ to simplify the reporting process?‍

-Before checking their alignment, businesses must first determine if they are within the scope of the Regulation. Following this, 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 Financial KPIS (Turnover, Capex and OpEx) to obtain a measure of their alignment percentage.

As the Regulation remains in force with a timeline extending at least until 2050, the EU Taxonomy is here to stay. Companies already within the scope of the Regulation can either view this as just another annual reporting exercise or leverage this reality as an opportunity. Part of that opportunity involves streamlining the reporting process. This can be achieved by following a consistent, predefined process year after year, implementing data sanity checks, and maintaining an audit trail.

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What are the main challenges in complying with the EU Taxonomy?‍

-Taxonomy reporting can be a daunting challenge for organisations 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 these challenges is to acquire expertise in the field if you do not already possess it, spend time understanding what kind of data is needed to meet the reporting requirements, and reduce the very time-consuming and manual processes through optimised software.

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How does Factlines' software make EU Taxonomy reporting easier?‍

-Factlines' software minimises manual tasks and reduces reliance on cumbersome spreadsheets. Users can easily access previous entries and documents across multiple assessment years to improve accuracy and make the reporting process more efficient. Businesses that have reported before, and understand how frustrating it can be, will find their reporting experience significantly improved with this software.

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What is your best advice for businesses preparing for EU Taxonomy compliance?

-There are many aspects I could mention, but I recommend that those responsible begin early to identify any data gaps within the business. This allows them to develop a plan to address these shortfalls and ensure timely reporting. For certain industries, such as Construction, the EU taxonomy can also be utilised to pre-approve new projects. Therefore, I suggest reading up on this or seeking advice from us on the best way to approach the opportunity.
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