The EU Taxonomy Regulation introduces a new mandatory non-financial disclosure requirement for large companies that fall under the Non-Financial Reporting Directive. Companies will have to disclose how and to what extent their activities are associated with environmentally sustainable economic activities. This should be done in accordance with the conditions, lists of economic activities, descriptions and criteria provided by the EU Taxonomy Regulation and respective Delegated Acts.
EU Taxonomy reporting is now mandatory for certain large companies while others, including SMEs, can report voluntarily. This new reporting data should be included into company’s sustainability report. Depending on national legislation, sustainability report can either be part of company’s Annual report or can also be published separately.
WHAT SHOULD BE REPORTED AND WHEN?
Companies should disclose the proportion of their turnover, capital expenditure (Capex) and operational expenditure (Opex) that are Taxonomy-aligned. These are the KPIs (key performance indicators) and they are all important. Turnover shows where a company is now in relation to the EU Taxonomy. While Capex provides an understanding of where the company is going, company’s plans and strategic approach.
New disclosure requirements for corporate actors start to apply already in 2022. For the first round of reporting in 2022, covering the year 2021, the requirements will be limited. Companies will only have to disclose the proportion of their activities that are Taxonomy-eligible or covered by the EU Taxonomy. It is not yet required to do the actual assessment of whether these activities comply with the criteria. The full reporting requirements start to apply from 2023.
Terms that are used in the legislation to describe the reporting requirements can cause some confusion. What does “eligible” activity and “aligned” activity mean?
These are the definitions you should be familiar with to understand the reporting requirements.
- If an economic activity is covered by the EU Taxonomy, it is called “taxonomy-eligible”.
- If an economic activity is covered by the EU Taxonomy and fulfils the technical screening criteria, it is considered environmentally sustainable or “taxonomy-aligned”.
- If an economic activity is not covered by the EU Taxonomy, it is called “taxonomy non-eligible”.
Not all economic activities are currently covered by the EU Taxonomy. The focus is on those activities and sectors that have the biggest potential to contribute to the climate objectives, such as energy, manufacturing, construction and real estate, transport. The idea is that other activities, not yet covered, will be added in future.
The EU Taxonomy reporting is a new process for everyone. As a starting point, it is necessary to identify those Taxonomy-eligible activities that are relevant for a company’s business. This can be done with the use of NACE codes (Nomenclature of Economic Activities) on which the EU Taxonomy classification is based. The descriptions of economic activities should be considered as well.
Sweco is required to do this reporting and will publish it for the first time in 2022. It is currently a learning by doing process to some extent for all as the timing is tight and instructions limited. This process may seem difficult in the beginning but in the long term it will be beneficial for a company as being transparent and providing more sustainability information to the market enables more investors to invest into company’s projects. Specialists at Sweco can help businesses figure out the reporting requirements under the EU Taxonomy.
The EU Taxonomy is a “living” document that will gradually develop and improve over time. Technical screening criteria will be established for all environmental objectives and more sectors and activities will be covered. The range of companies that are required to report will also be expanded.
The role of the sustainability reporting in general is growing. The intention is to bring the sustainability reporting to the same level as financial reporting. Sustainability reporting standards will be established in the EU as well as on international level.
– Olga Gerasina, Environmental law specialist, Sweco
Specialists at Sweco can help businesses figure out the reporting requirements under the EU Taxonomy. More information can be found here.