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How Taxonomy regulation effects your business

From 2023 large companies as defined in the CSRD (Corporate Sustainability Reporting Directive) and, from January 1, 2026, small and medium-sized enterprises of stock listed companies shall include in the management report information necessary for an understanding of the sustainability impacts of the company’s activities and the impact of sustainability issues on the company’s business performance, financial results and position including the so-called taxonomy information.

The proposed Corporate Sustainability Reporting Directive would apply to some 49 000 companies, compared to approximately 11 000 that are subject to the existing sustainability reporting rules (the Non-Financial Reporting Directive. All large companies, and all companies listed on EU regulated markets except listed micro-enterprises, would be subject to these reporting requirements. They would have to report information on the full range of environmental, social and governance issues relevant to their business including the taxonomy KPI: Turnover, CAPEX and OPEX.

Criteria for environmentally sustainable economic activities according to Taxonomy Regulation

For the purposes of establishing the degree to which an investment is environmentally sustainable, an economic activity shall qualify as environmentally sustainable where that economic activity:

  1. contributes substantially to one or more of these environmental objectives:
    • climate change mitigation;
    • climate change adaptation;
    • the sustainable use and protection of water and marine resources;
    • the transition to a circular economy;
    • pollution prevention and control;
    • the protection and restoration of biodiversity and ecosystems.
  2. does not significantly harm any of the environmental objectives mentioned above
  3. is carried out in compliance with the minimum safeguards:
    • The minimum safeguards shall be procedures implemented by an undertaking that is carrying out an economic activity to ensure the alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.; and
  4. complies with technical screening criteria that have been established by the Commission

Examples are for the substantial contribution of an economic activity to climate protection: Environmental objective „climate change mitigation“: i.e. Process of holding the increase in the global average temperature to well below 2 °C and pursuing efforts to limit it to 1,5 °C above pre-industrial levels, as laid down in the Paris Agreement:

1. Generating of renewable energy; increasing clean mobility; switching to renewable materials; enablement of such activities

2. Generation, transmission, storage, distribution or use of renewable energy.

3. Increasing energy efficiency

4. Expansion of climate-neutral mobility

5. Switch to the use of renewable materials

6. Increasing the use of environmentally friendly CO2 capture and use/storage technologies

7. Strengthening CO2 reduction in rural areas by preventing deforestation and forest degradation Restoration of forests and croplands, green areas and wetlands, through reforestation and regenerative agriculture

8. Establishment of decarbonized energy infrastructure

9. Production of clean and efficient fuels

10. Enabling the activities mentioned here 

11. Supporting the transition to a carbon-neutral economy by phasing out greenhouse gas emissions

Examples are for the substantial contribution of an economic activity to climate change adaption: Environmental objective „climate change adaptation“: i.e. process of adjustment to actual and expected climate change and its impacts on environment, people, economic activity or assets:

  1. Protection of production sites by the sea; establishment of rain catchment basins in drought-prone areas

2. Adaptation solutions that reduce the risk of climate change on economic activity or reduce the adverse effects of climate change. E.g., protection of production facilities from natural disasters such as flooding.

3. Adaptation solutions that avoid or reduce the risk of climate change on people, nature, and assets. E.g. construction of rain catchment basins in drought-prone regions

Data collection – Key performance Indicators (KPI)

Companies have to prepare the following KPI:

Turnover: includes goods and services from economic activities that have been adapted to climate change and:

  1. are enabling activities and additionally contribute to reducing the risk of adverse effects of the current and expected future climate on people, nature, or assets without increasing the risk of adverse effects on people, nature, or assets

2. Are taxonomy-aligned

CAPEX (Capital Expenditures) = Investments: CAPEX related to taxonomy economic activities:

  1. CAPEX associated with taxonomy assets or processes

2. CAPEX that contributes to the expansion of taxonomy economic activities or to transform economic activities into taxonomy-aligned ones

3. CAPEX related to the purchase of output from Taxonomy economic activities and individual measures enabling the target activities to become low-carbon or to lead to greenhouse gas reductions

OPEX (Operating Expenditures): OPEX related to taxonomy economic activities

  1. OPEX associated with taxonomy assets or processes

2. OPEX that contributes to the expansion of taxonomy economic activities or to transform economic activities into taxonomy-aligned ones

3. OPEX related to the purchase of output from Taxonomy-economic activities and individual measures enabling the target activities to become low-carbon or to lead to greenhouse gas reductions

Reporting

According to Art 8 Taxonomy Regulation any undertaking which is subject to an obligation to publish non-financial information according to CSRD shall include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable under the taxonomy regulation. In particular, non-financial undertakings shall disclose the following:

  1. the proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable; and
  2. the proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable

If an undertaking publishes non-financial information according to CSRD in a separate report, the information can be published in that separate report.

Conclusio

The taxonomy regulation puts an administrative burden to businesses; but it will have a positive impact on society and environment. The procedures and processes need to be established to collect the taxonomy relevant data. In general, the preparation time will be several months in order to achieve a good quality. Contact us to set up your taxonomy reporting.

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Georg Tichy

Georg Tichy is a management consultant in Europe, focusing on top-management consultancy, projectmanagement, corporate reporting and fundingsupport. Dr. Georg Tichy is also trainer, lecturer at university and advisor on current economic issues. Contact me or Book a Meeting