Taxonomy and CSRD or how Europe goes green
Taxonomy and CSRD or how Europe goes green
Taxonomy regulation
The Taxonomy regulation establishes a new uniform language for assessing the durability of various economic activities. The main objective is to accelerate the economic transformation towards a sustainable corporate governance, and most importantly, to enable the EU meeting its greenhouse gas reduction targets.
At the heart of this legislation lies the link between the financing of companies and the durability of their activities. As there is no uniform definition of sustainable investment, the legislator has chosen to work with a standardised green classification system.
For an activity to qualify for the 'green' label, it must make a substantial contribution to at least one of the six environmental goals:
- climate change mitigation
- climate change adaptation
- sustainable use and protection of water and marine resources
- transition to a circular economy
- pollution prevention and control
- protection and restoration of biodiversity and ecosystems.
This however without significantly doing harm the other five goals (‘Do No Significant Harm or DNSH’-criteria). Furthermore minimum safeguards in terms of human rights and labour law need to be respected.
To determine whether a substantial contribution is made to (one of the) the goals and/or to determine that no significant harm is done, the European Commission has defined per goal which economic activities are eligible to substantially contribute and what very specific technical criteria that economic activity has to meet in order to effectively contribute and/or do no significant harm. If the technical criteria are met, this activity is considered ‘aligned’.
To date, the Commission has only adopted a delegated act, defining the economic activities and technical criteria for the goals of climate change mitigation and climate change adaptation. With respect to the other environmental goals a consultation round was held and a new draft was published on 13 June 2023.
Currently large listed companies with over 500 employees already have to comply with this reporting obligation. From 1 of January 2025 on all the large (even non listed !) companies will fall under the scope of the Taxonomy regulation.
It goes without saying that this will affect a large number of companies (estimated to be around 49K companies in the EU).
In order to determine their ‘degree of sustainability’ companies within scope will have to report the portion of their turnover, Capex and Opex linked to aligned activities (as described above), also as a part of their CSRD reporting (see below). This will obviously require some thorough preparation by the entities involved.
CSRD
The CSRD harmonises, broadens and strengthens the non-financial reporting obligation for companies in the EU. The CSRD implements obligations regarding sustainability reporting in addition to the financial reporting set out, amongst others, in the European Accounting Directive.
The purpose is to increase transparency and ensure that ESG-information (environmental, social and governance) is understandable, relevant, verifiable, comparable and represented in a faithful manner.
Companies that fall under the scope (similar as those that fall under the Taxonomy regulation, as described above) will have to integrate ESG topics in a dedicated section of their mandatory annual management report. This report will also be subjected to the assurance of an auditor.
The principle of double materiality is key in this directive. This implies that the entity should not only report on its own impact on sustainability matters (outward impact), but also consider how the undertaking is affected by ESG matters (inward impact).
The number of topics to be addressed in the reporting is long and detailed. Amongst others, it should address different topics going from the undertaking's business model and strategy pertaining to ESG matters to the specific roles, responsibilities and expertise of the management in relation to these matters. It needs to contain a description of the time-bound targets and the undertaking’s policies in relation to sustainability matters, including the due diligence process implemented by the undertaking and the principal actual or potential adverse impacts connected with the undertaking’s own operations and with its value chain, and many, many more topics need to be addressed and data will need to be shared…..
In order to ensure the transparency and comparability of the reporting of all the companies involved, the Commission, with assistance of the EFRAG, will develop ’European sustainability reporting standards’ (ESRS). These will contain very specific rules on how and on what to report. Since 9 June 2023 a public feedback round is ongoing and the final ESRS’s are expected to be approved before the end of this year.