How the EU Taxonomy connects to other key ESG frameworks

In this interview, we sit with Joana Belo Pereira, our EU Taxonomy Product Manager, to learn more about ESG regulations. We asked her about the EU Taxonomy for Sustainable Activities, Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD), Sustainable Finance Disclosures Regulation (SFDR), and The Norwegian Transparency Act (Åpenhetsloven) to find out more about how they are all connected to shape a sustainable, transparent, and responsible business landscape.

If you have any questions or want to learn how Factlines can help you with the EU Taxonomy, please click the button at the bottom of this interview.

- Joana, can you start by giving a brief overview of what the EU Taxonomy, CSRD, CSDDD, SFDR, and the Transparency Act in Norway entail?

All these criteria and guidelines are interlinked in their aim to make companies more responsible, transparent and sustainable. They emphasize the importance of considering human rights, environmental impact and sustainable practices in business operations and reporting. While the Transparency Act and CSDDD focus on due diligence in operations and supply chains, CSRD and the EU Taxonomy are more about reporting and classification of sustainable activities.

Meanwhile, the Corporate Sustainability Reporting Directive (CSRD) expands upon the EU Taxonomy by mandating large and listed companies to disclose information on how social and environmental issues impact them and the broader world.

The Corporate Sustainability Due Diligence Directive (CSDDD) promotes sustainable and responsible corporate behavior, emphasising human rights and environmental considerations. The Sustainable Finance Disclosures Regulation (SFDR) defines how financial market participants disclose sustainability information, aiding investors in making informed choices aligned with sustainability objectives.

Lastly, The Norwegian Transparency Act emphasises the importance of transparency in business operations, particularly concerning human rights.

- How do these criteria aim to promote sustainability, transparency and responsible business practices?

These criteria serve a dual purpose; they act as legal deterrents to unsustainable activities while promoting positive initiatives. By drawing clear lines between acceptable and unacceptable behavior, and supporting sustainable actions such as recycling and circular models, these criteria aim to promote more responsible business. They encourage companies to consider the wider impact of their activities, ensuring that sustainability, transparency and accountability are at the forefront of business practices.

- Are there common goals or recurring themes across climate and environment, social and responsible and ethical business management (ESG)?

Yes, the overarching theme is sustainability. While each criterion may focus on specific aspects, such as environmental protection, social responsibility or corporate governance, they all contribute to the larger goal of creating a sustainable future. They work together to ensure that companies comply with legal requirements and contribute positively to society and the environment.

- How does compliance with one criterion often lead to the need to comply with other criteria, creating an interconnected regulatory landscape?

Companies don't decide what they must comply with; regulators do. So the first question every business needs to ask itself is: Am I inside or outside the scope of this law? Typically, the law itself should provide a simple answer by outlining a set of criteria for compliance: the location of the business, the size of the business, how much money the business generates, and its potential social and environmental impact. Generally speaking, some industries or activities that are labeled higher impact tend to be subject to more scrutiny than others.

In the realm of EU Directives and Regulations, there's an intricate web of laws known as the acquis. These laws are interwoven and often reference each other, meaning compliance with one directive usually implies having to adhere to several others. It's not just a matter of selecting which regulations to follow; businesses must understand the entire legal framework, which often extends to international conventions and protocols. These layers of legislation create a comprehensive, albeit complex, system that businesses must navigate.

‍- What are the consequences for companies that do not meet the requirements of these regulations? ‍
Non-compliance can lead to different direct consequences, depending on the penalties defined by law and the severity of enforcement by national authorities. These can range from fines to more serious legal measures. However, the indirect consequences can be just as impactful, if not more so. Examples range from reputational damage and difficulties in securing contracts to long-lasting effects on relationships with stakeholders and the market.

- How can non-compliance negatively impact a company?

Non-compliance is not just a legal issue; it's a trust issue. Serious cases can lead to significant reputational damage, affecting consumer and partner trust. For B2C companies, this can mean loss of customers; for B2B, it can hinder the maintenance and establishment of new business relationships. Financial institutions also view non-compliance as a risk, making it harder and more expensive for businesses to secure funding. The degree of non-compliance also matters; more serious or repeated violations attract more attention and more severe consequences.

- What challenges do companies face when trying to adapt to multiple ESG-related policies simultaneously?

One of the primary challenges is the complexity and volume of requirements. Understanding and keeping up with the different criteria can be daunting for many companies, especially those without a dedicated sustainability department. There is also the issue of annual reporting, often carried out by individuals who may not be fully familiar with the sustainability criteria. This can lead to misunderstandings, missed updates and lost documentation. Complying with multiple criteria at once can quickly become overwhelming, which in turn can lead to errors and omissions.

- Can you give examples of the reporting complexity that managers have to deal with?

Absolutely. Many companies need help dealing with the challenges associated with ambiguity or a mishmash of data points. The amount of information and the subtle nuances of what is being requested can lead to significant confusion and errors. There is also the issue of duplication in reporting and differing standards across the criteria, making it challenging to maintain a clear and consistent reporting strategy.

- How can digital tools and software platforms like Factlines help companies manage the different requirements?

Digital tools and software platforms offer several benefits. They can demystify requirements by making them more clear and understandable. Consistent use of a digital tool also ensures continuous, organized documentation, which significantly eases the burden of annual reporting and makes third-party audits much easier. These tools can shift the focus from trying to understand what is required to gathering and analyzing the necessary information.

- Can centralizing documents and data save companies time and resources for reporting purposes?

Yes! A centralized data repository eliminates duplication of effort and time spent searching for previous documentation. It reduces inefficiencies caused by employee turnover and loss of information. By having a single, trusted source for all ESG-related documents and data, companies can streamline their processes, reduce errors, and save significant time and resources that would otherwise be spent managing and searching for scattered information.

- What role does transparency play in improving stakeholder relations and promoting a positive ESG reputation?

Transparency is essential to building trust and credibility with stakeholders. It signals that a company is committed to ethical practices, long-term sustainability and accountability. By being transparent, companies comply with the criteria and demonstrate dedication to positive impacts, which can significantly improve reputation and relationships with customers, partners and investors.

-Are there any new trends or regulatory developments that companies should be aware of going forward?

The regulatory landscape is constantly evolving. The EU and other bodies are increasingly aiming to align ESG and financial standards. This means that companies can expect tighter regulatory handling in the years to come. Staying informed about these developments is crucial for companies to anticipate changes and adapt their practices accordingly, and maintain compliance.

- How can staying informed and working proactively help companies stay ahead of evolving ESG requirements?

The benefit of working proactively is that it is easier to get an overview and prepare for upcoming criteria before they come into effect. Since legislation is usually announced well in advance, companies that stay on top of these changes can adjust their practices and see it as an opportunity for improvement and differentiation. Staying ahead of the curve not only ensures compliance, it can also provide a significant competitive advantage.

‍If you have any questions or want to learn more about how Factlines can help you with the EU Taxonomy, please click the button at the bottom of this interview.

January 2024
EU Taxonomy