What does the EU Taxonomy mean for organizations?
More and more Swedish companies are affected by the new EU Taxonomy, a legal regulation and classification system for how green a company is. Here we describe what the taxonomy means for your organization, what you need to think about and how to get started with your reporting.
Before we go into how an organization should comply with the taxonomy, itÂ´s important to describe the context. EU is aiming at becoming the worldÂ´s first â€œclimate-neutral blocâ€ by 2050, and the taxonomy is a tool to help the union and organizations to become more sustainable.
What is the EU Taxonomy?
The EU taxonomy is a part of the European CommissionÂ´s action plan on financing sustainable growth, and a tool to help investors and companies navigate the transition to a low-carbon, resilient and resource- efficient economy. To achieve the Paris Agreement there is a need of massive investments within the European industry and the taxonomy is only the first of regulations included in the plan for financing sustainable growth.
The aim is not to put â€environmental villainsâ€ in the spotlight, the regulation is a classification system and is intended to encourage organizations to develop in a more sustainable direction. The system is a way of identifying green services, products and working methods, i.e. so-called green economic activities within the organization. It is a complete detailed categorization of what is sustainable for the different sectors in the taxonomy and is presented in an easier way to make it more accessible in (the EU Taxonomy Compass).
How to comply with the EU Taxonomy?
Organizations affected by the regulation needs to disclose new KPIs connected to the taxonomy in the Sustainability Reporting (turnover, CapEx and OpEX) and this information will later be reviewed by auditors. This means that the reporting is a shared responsibility for the Sustainability Manager and the CFO.
Who is affected by the EU Taxonomy?
Large, listed companies with over 500 employees need to report according to the taxonomy. During 2023 listed companies with over 250 employees will be included.
In addition, financial market participants and issuers that offer financial products within the EU (pension funds, banks, asset managers, etc.) are also covered.
The market will drive the change
With a common classification system, there is a common language and definition of what is sustainable. Now we no longer compare different items with each other, instead there is clarity and transparency. This means that it becomes clearer for investors, clients, and employees which organization is more sustainable. Company x has 32 percent green turnover compared to company y which has 17 percent green turnover. The idea is that the market should drive the development, for there is no high sanctions linked to the regulation as there are to GDPR.
A growing framework â€“ more objectives will be included
The taxonomy is implemented softly both in terms of sectors and reporting requirements. In the first stage, the taxonomy covers a number of sectors with the highest environmental impact.
The green activities (turnover) are classified based on whether they contribute to six objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainability and protection of water and marine sources
- Transition to circular economy
- Pollution and prevention control
- Protection and restoration of biodiversity and ecosystemsâ€‹â€‹â€‹â€‹â€‹â€‹â€‹
One important condition is that the activity shall do no significant harm to any of the other five environmental objectives. Another condition is that the organization shall comply with minimum safeguards within labor law and human rights.
The taxonomy entered into force during summer 2020 and in January 2022 the soft implementation started. In the beginning of 2023, all non-financial companies must report all KPIs connected to the first two objectives, but in a near future the demands will extend to all objectives and organizations. Important to know is that the requirements will not be static, they will be evaluated and changed if needed.
The requirements affect widely in the organization
The taxonomy has been developed during a short time and will change and expand in the coming years. There are many interpretation questions yet to be solved. These upcoming changes make it even more difficult to take into account when implementing new processes and way of working.
According to our experience, organizations need an adaptive process and digital support that automates the collection of information. Requirements are not only aiming at new competences, but also systems, data management and processes need to be reviewed. To understand how the taxonomy should be implemented different skills are needed, not only in finance and accounting skills. But above all, organizations need to set a clear strategy and target image around â€œWhat does the taxonomy mean for us?â€ and identify the business opportunities of implementing the taxonomy from a broader strategic perspective.
Checklist for implementation
- Investigate and analyze how the business is affected by the taxonomy
- Do you have the right skills and competences to understand the requirements?
- Which technical screening criteria are relevant for you?
- Which information do you need to collect and how can you collect it?
- Which KPIs do you need to report for the present fiscal year?
- What resources do you need to manage the taxonomyÂ´s requirements for data management, system changes and reporting etc.?
- How do you communicate and anchor the taxonomy and its requirements on the organization?
About the author:
Johanna WallnÃ¤s, specialist in law including the EU Taxonomy and digital sustainability strategist
We offer deep competence within sustainability, EU regulation, data management, reporting and digitalization of the entire process. Contact us with your questions.