Frequently Asked Questions (FAQs)
- What is the European Taxonomy?
The European Union is putting in place a comprehensive and far-reaching regulatory framework for sustainability reporting and sustainable finance. In December 2019, the European Commission presented the European Green Deal, a programme of actions to transform the European economy, in line with the Paris Agreement climate objectives and the UN Sustainable Development Goals. In that context, the EU has set itself 6 overarching environmental objectives, which frame policy-making and regulation in the field of sustainability-reporting and sustainable finance.
The Taxonomy Regulation was published in June 2020, and has now entered into force. It is like a dictionary, which classifies green economic activities by providing consistent, objective criteria companies can use to determine whether these activities make a substantial contribution to the EU environmental objectives. Companies then have to report which proportion of their Turnover, CapEx and Opex can be considered green, or rather “Taxonomy-aligned” (cf. below or our Whiite Paper on the EU Taxonomy).
- What does the Union aim at achieving with the Taxonomy?
There is a very clear goal behind the disclosure requirements faced by European companies. The publication of each company’s percentage of ‘Taxonomy-alignment’ (which is a proxy for the extent to which it contributes to the creation of a greener European economy) will allow investors and Financial Market participants to be better informed about the sustainability of the companies in which they invest. That way, EU institutions hope to prevent green washing and re-orient capital flows towards green and sustainable activities (e.g., through the InvestEU Programme, which is aimed at leveraging EURO 279 billion of public and private investments for climate financing between 2021 and 2027).
- What is the current scope of application of the Taxonomy?
The scope of the Taxonomy is governed by the Non-Financial Reporting Directive (NFRD). It currently covers large public-interest companies with more than 500 employees, which have to report on their Taxonomy Alignment as of January 1, 2022. In total, approximately 11 700 large companies and groups across the EU are subject to these reporting requirements, including listed companies, banks, insurance companies and other companies designated as “public interest entities” by national authorities. They are thus required to use the Taxonomy framework to report the share of their Turnover, CapEx and OpEx that can be considered “environmentally sustainable” or “Taxonomy-aligned”. The purpose of the Taxonomy is to help companies find out which of the economies activities they perform are eligible for Taxonomy-alignment, and will thus be factored into the “environmentally sustainable” share of their KPIs.
The Taxonomy describes every criterion that an activity has to fulfill in order to be considered environmentally sustainable. By referring to it, companies are able to compile all of the necessary information to determine their overall Taxonomy alignment (the higher, the better!). Therefore, understanding this framework is paramount for companies if they want to remain in compliance with their disclosure obligations, but also if they want to attract new green investments.
- The European regulatory framework on sustainability reporting is evolving. How and when exactly is that going to impact my company?
Sustainability reporting for companies is currently regulated by the Non-Financial Reporting Directive (NRFD). However, a new piece of legislation is in the process of being approved by the European Institutions : the Corporate Sustainability Reporting Directive (CSRD) will amend NFRD reporting requirements by extending the scope of sustainability reporting obligations. All companies listed on regulated markets, as well as to a wide range of unlisted large and midsize companies making up around 75% of the European Union’s global turnover (that is, in total, more than 55 000 companies) will be required to report on their Taxonomy alignment from January 1, 2023.
The CSRD will also require that all sustainability reports are subject to an external independent audit, which used to be optional under the NFRD. The disclosed information will also have to be digitally tagged by companies, as it will need to be machine-readable to feed the upcoming European Single Access Point (for more information on what the ESAP is, see question 7).
- My company is mid-sized and unlisted. Should we start caring about Taxonomy reporting right now?
The CSRD expands the scope of companies that are required to report on the Taxonomy: first, all companies listed on regulated markets will have to report on their Taxonomy alignment, except for listed micro-entreprises. Second, and most importantly, will also be required to report all companies (listed or not) meeting two out of three of these criteria:
(1) EUR€40 million in net turnover
(2) EUR€20 on the balance sheet
(3) 250 or more employees
These criteria correspond to the European definition of a medium-sized company and everything above. In total, about 55,000 companies (representing around 75% of the EU’s global turnover) will have to comply with Taxonomy-reporting obligations by Jan 1, 2023.
It is also important to note that, currently, the companies that have to disclose their Taxonomy-alignment only have to do so for 2 environmental objectives (climate change mitigation and adaptation). However, when disclosure obligations will start applying to unlisted and mid-sized companies, the criteria to assess alignment with all environmental objectives will have been published : this means that, as soon as they start publishing sustainability disclosures, these companies will have to report the percentage of alignment of their KPIs with regards to all environmental objectives.
- Where will Taxonomy-related disclosures have to be published?
All Taxonomy-related disclosures will normally have to be located in the company’s annual management report, pursuant to the NFRD. In addition to that and on a voluntary basis, Taxonomy disclosures can also be mentioned in the company's Annual Report as they rely on financial KPIs. Another option is for the company to draw a separate report dedicated to non-financial/sustainability disclosures.
/!\ Important to note : from the entry into force of the CSRD, Taxonomy disclosure data will also have to be digitally tagged by companies, in order to be machine-readable. The proposed directive provides for the creation of a European Single Access Point (sort of an Union-wide search engine) where all company reports will all be gathered and made publicly available.
- What will the European Single Access Point consist of, exactly ?
The establishment of an European Single Access Point (hereinafter ESAP) is aimed at providing EU-wide centralised electronic access to information activities and products of the various categories of entities that are required to disclose such information, which is relevant to sustainable finance in an efficient and non-discriminatory manner.
Information will have to be disclosed in a data-extractable format and, where appropriate, in a machine-readable format. Metadata will also have to be included, and the information will have to contain a qualified electronic seal. Finally, it is expected that the information will have to be free from any conditions or subject to an open standard license. All of this information will have to be transmitted to “collection bodies”, which are still to be concretely defined. It is most likely that they will consist of the current National Competent Authorities, although some involvement of the European institutions is to be expected as well.
The main goal behind the establishment of such a common platform is to promote the development of smaller national capital markets and economies by giving them greater visibility. Non-listed entities, including SMEs, will be able to disclose info on the ESAP on a voluntary basis to facilitate their access to capital. Access to ESAP is primarily directed at investors, financial analysts and market intermediaries like asset managers advisers and data aggregators. Easily usable and available information about the sustainability of European undertakings will allow public authorities, private stakeholders and civil society to better assess the sustainability of these undertakings.
- What are the environmental objectives my company’s activities may contribute to?
As the foundation of the Green Deal, EU institutions set 6 environmental objectives:
(1) Climate Change Mitigation
(2) Climate Change Adaptation
(3) The sustainable use and protection of water and marine resources
(4) The transition to a circular economy
(5) Pollution prevention and control
(6 ) The protection and restoration of biodiversity and ecosystems
In order to qualify as Taxonomy-eligible (or “environmentally sustainable”), an economic activity must contribute to at least one of the previous objectives. But it doesn’t stop there : the activity must also respect the DNSH criterion, which implies that the activity’s performance does no significant harm to any of the other environmental objectives. It also mandatory for so-called “Minimum Social Safeguards” to be respected at the company-level : these safeguards are defined in the Taxonomy regulation, and imply that a company complies with the Human and Labour Rights enshrined in the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
- How can I prove that one of my company’s activities significantly contributes to an environmental objective?
Whether an activity makes a substantial contribution to an environmental objective, does not harm any of the others, and complies with the Minimum Safeguards, must be measured pursuant to the Technical Screening Criteria. These are set forth in the Taxonomy Delegated Acts and in their annexes: they establish the precise conditions (either qualitative and quantitative) regulating whether an activity can or cannot be considered Taxonomy-aligned.
As of now, the Technical Screening Criteria for substantial contribution to Climate Change Mitigation and Climate Change Adaptation, as well as the criteria outlining DNSH on all environmental objectives and minimum safeguards, are the only ones to have entered into force. The delegated act outlining the Technical Screening Criteria for the four remaining environmental objectives is expected to enter into force on January 1, 2023.
/!\ Important to note : January 1, 2023 is also the date of entry into force of the CSRD. This means that companies publishing their first sustainability reports under the CSRD will have to disclose the percentage of their Turnover, CapEx and OpEx associated with environmentally sustainable activities significantly contributing to climate mitigation and climate adaptation and the percentage of these KPIs associated with activities significantly contributing to the four other environmental objectives (the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems).
- How can I prove that my company’s activities also comply with the DNSH criterion and with the Minimum Safeguards?
Once substantial contribution is proved with regards to one of the 6 environmental objectives for an activity, the company will also have to assess whether that same activity Does No Significant Harm to any other of the environmental objectives. There also exists Technical Screening Criteria that are to be applied to the DNSH requirement : these are found in the Annexes to the Climate Delegated Act of June 4th, 2021.
While the compliance-assessment for DNSH also has to be conducted at the activity-level, it is currently sufficient to conduct a company-level assessment of compliance with the Minimum Social Safeguards. By cross-referencing its Human and Labor Rights Protection framework with the contents of the :OECD Guidelines for Multinational EnterprisesUN Guiding Principles on Business and Human Rights: including the declaration on Fundamental Principles and Rights at Work of the International Labor Organization (ILO) the 8 fundamental conventions of the ILO the International Bill of Human Rights.
- What are the exact steps to be followed to report Taxonomy alignment for my companies’ activities?
(1) Setting up an analysis and processing system for the company’s data
(2) Eligibility mapping : companies must identify activities that are eligible for Taxonomy-alignment
(3) Verification of taxonomy-alignment Determine whether the activity substantially contributes to one or more of the Environmental objectives
Check whether Technical Screening criteria have been published with regards to this activity + this environmental objective Calculate the percentage of overall Turnover, Capex and Opex associated with this activity in order to factor it in the company’s overall alignment percentage Check that this activity does no significant harm (DNSH) to any other of the environmental objectives Check that activities at the company-level are compliant with the Minimum Human and Labor rights safeguards defined in the Taxonomy
(4) Putting all of its eligible activities together, the company must now estimate the total proportion of its Turnover, CapEx and OpEx that can be considered Taxonomy-aligned
⇒ In order to report the highest possible percentage of Taxonomy-aligned KPIs, companies have to perform all of these steps for every eligible economic activity that they perform. It is important to keep in mind that companies should look beyond what they themselves produce in order to reach as high a Taxonomy-alignment percentage as possible. The percentage of their CapEx and OpEx associated with environmentally sustainable activities is also eligible for Taxonomy-alignment: hence, it makes sense for them to evaluate the Taxonomy-alignment not only of activities which represent a great part of their Turnover, but also activities in which they invest or for which they have extensive operational expenditures.
- What is the difference between enabling and transitional activities?
Within their Taxonomy-alignment disclosures, companies will also have to differentiate between so-called ‘enabling’ and ‘transitional’ activities. Transitional activities are the ones that, by being performed by the company, substantially contribute to an environmental objective in and of themselves. Enabling activities, in contrast, are activities that enable other economic activities (whether they are performed by your company or not) to make a substantial contribution to an environmental objective.
- How can Briink help decipher Taxonomy-reporting obligations?
Briink is developing an intuitive and accurate AI-powered platform to facilitate your sustainability reporting. By leveraging AI, machine learning and NLP, its software platform will allow your company to save considerable time and consultancy fees.
The platform will be able to facilitate the completion of all steps of taxonomy reporting : ⇒ It can determine which of your company’s activities are Taxonomy-eligible activities by automatically matching Taxonomy classification with NACE codes⇒ It will cross-reference Technical Screening Criteria with the qualitative and quantitative data uploaded by your company in order to find evidence of substantial contribution and DNSH/Minimum Safeguards compliance for each activity.⇒ It will determine which KPIs are worth reporting for each activity, based on the potential increase in your company’s overall Taxonomy alignment score ⇒ It will match the relevant KPIs needing to be reported for each activity, and calculate the proportion of the overall KPIs associated with eligible activities
And much more …
→ The AI tool can also estimate the overall percentage of activities eligible for alignment
→ Thanks to Natural Language Processing, our software can extract evidence of compliance from both qualitative and quantitative company input (text documents and statistical data)
→ Using our software platform also allows you to centralize, save and reuse sustainability-reporting data and tools in order to speed-up and facilitate future reporting
→ Alignment-assessment is guided and becomes an easy and intuitive workflow
→ Your ESG department can receive regulatory alerts and updates on Taxonomy reporting that are tailored to the specific economic activities your company has to report on.