The EU has committed to being climate-neutral by 2050 and has set out an ambitious strategy in support of this aim. But transitioning to a low-carbon, more sustainable economy requires significant investment. In 2020 McKinsey & Company suggested that the costs for Europe to become climate-neutral by 2050 would be approximately €28 trillion. To help redirect investment towards sustainable projects and activities, the EU has recognised the need for a common language and clear definitions of what is sustainable.
What is the EU Taxonomy?
The EU Taxonomy is a classification system which sets out a list of environmentally sustainable economic activities and which provides companies, investors and policymakers with appropriate definitions for activities that can be considered environmentally sustainable.
The EU Taxonomy establishes six environmental objectives: (i) climate change mitigation, (ii) climate change adaptation, (iii) the sustainable use and protection of water and marine resources, (iv) the transition to a circular economy, (v) pollution prevention and control and (vi) the protection and restoration of biodiversity and ecosystems and for each of these objectives there is or will be a list of activities that are considered to be environmentally sustainable activities. These lists of environmentally sustainable activities will evolve over time.
An activity is recognised as green or 'environmentally sustainable', if it makes a substantial contribution to at least one of the environmental objectives whilst at the same time not significantly harming any of the other environmental objectives, meets minimum social safeguards and complies with technical screening criteria.
Who does it apply to?
All companies doing business within the EU can use the EU Taxonomy to plan their climate and environmental transition but the EU Taxonomy, which was established by the Taxonomy Regulation, is just one part of a broader sustainable finance framework. It sits alongside the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR) and between the Taxonomy Regulation, CSRD and SFDR, mandatory disclosure obligations for certain companies and investors in Europe and, indirectly, in the UK are being introduced.
The Taxonomy Regulation applies to measures that are adopted by the EU or member states setting out requirements for financial market participants or issuers who are making environmentally sustainable financial products or corporate bonds available, all financial market participants making financial products available and large public-interest entities that are required to publish non-financial statements. Banks, insurers and other entities which must comply with the requirements of the Taxonomy Regulation need to disclose information about their environmental performance as well as information about their Taxonomy-aligned activities.
CSRD increases the number of entities that must report and extends the scope of the reporting which those entities must provide. All large companies, whether listed or not and all listed companies (other than listed micro-enterprises) including companies that are not established in the EU but are listed on an EU regulated market and the EU subsidiaries of non-EU companies will need to publish non-financial statements that include, among other things, their sustainability targets, progress towards achieving those targets and details of their sustainability policies.
The first set of European Sustainability Reporting Standards (ESRS) were adopted by the European Commissions on 31 July 2023. A further 11 ESES have been drafted and will be adopted in the future. Although ESRS was expected to be in force in early 2023 with inscope companies reporting in accordance with applicable standards from financial year 2023 on 17 October 2023 the European Commission announced a two year delay in the implementation timetable. It is now expected that EU Companies will need to begin complying with ESRS from financial year 2026 (and reporting from financial year 2027) and that non EU companies which are inscope will not need to comply until financial year 2030.
Challenges
Even though your organisation may not, at present, be required to comply with the EU's sustainable finance disclosure regimes, your funders and investors or other stakeholders may be required to do so or be focussing their efforts on supporting organisations who have sustainability at the top of their agenda. Delays to the implementation and adoption of ESRS may also mean that attention needs to focus on complying with the UK and the ISSB standards. Determining which standards apply to your business, then applying those standards in order to assess your business activities and the areas for improvement, as well as our reporting obligations and then providing this information, as well as the supporting data, is not without its challenges. Neither is complying with the non-financial or sustainability reporting requirements. There is a lack of internal expertise in many organisations and the cost of complying may also be high. Embedding this type of risk assessment into your business strategy may also require real organisational change. It’s a change that needs to happen from the top down and isn't something that can happen overnight.
How we can help
Our highly skilled teams of specialists in areas such as green, social and sustainable finance, impact investment and blended finance, governance, employment and corporate can assist you in considering what organisational changes need to be made in order for you to move towards being able to comply with the applicable reporting requirements.
Strategic review
Understanding your business is the key to understanding what your organisation needs to do in order to comply with the applicable reporting requirements. We will get to know you and your team and work with you to assess what changes need to be made.
What is involved
Our experts will work with you to help you assess your readiness to comply with the applicable reporting requirements. We can assist with reviewing sustainability targets and progress towards achieving those targets as well as developing sustainability policies. You know your business best and we can help shape the targets and policies that will work for you. We can provide training on areas of interest to your executive team/board members.
What it will help you to achieve
Knowing what proportion of your organisation's activities are considered environmentally sustainable and being able to report this data as well as complying with other non-financial reporting requirements demonstrates your awareness of and commitment to managing the risks which we all face as a result of climate change, natural habitat destruction and other economic activities and will make for a more resilient company attractive to a wider variety of stakeholders.