As firms finish their first annual EU Taxonomy reporting procedures, Position Green taxonomy expert Tony Christensen has looked back on some of the pain points and lessons to be learned.
The EU taxonomy creates a clear framework for more sustainable enterprise and greener investing to help the EU meet its carbon-neutral target. Its goal is to establish a list of environmentally sustainable economic activities.
The framework has a phased-in approach, meaning firms only report on a portion of qualitative and quantitative information. Additionally, only two objectives were enforced for the first year, climate change mitigation and adaptation.
The recent call for feedback by the European Commission on a new set of EU taxonomy criteria shows how important this framework is and how it will continue to evolve over the coming years.
While the EU Taxonomy is an extensive framework, Christensen believes most companies have managed to overcome challenges and compile an adequate report.
One of the most pressing challenges firms experienced was the scope for interpretation of the regulation. “Often, it is not fully clear how the different criteria should be interpreted, which causes a lot of doubts and difficulties for many companies,” he said.
Another challenge some faced was understanding the total taxonomy alignment of the company. They needed to understand all underlying subsidiaries, projects, products, sites and more, all from a taxonomy perspective.
“This may entail a massive workload if the company is, for example, a group company with hundreds of subsidiaries, a real estate company with hundreds of units or a construction company operating on a project basis with hundreds of active construction projects.”
Both challenges proved that it is not easy to become taxonomy aligned. Christensen stated that the detailed criteria is often difficult to align with for many businesses.
For example, many companies underestimated what it takes to align with the Do No Significant Harm (DNSH) criteria for climate adaptation, as well as the processes needed to claim alignment with minimum safeguards.
Christensen said, “In that sense, the first year of reporting became more like a gap analysis where many companies reported zero alignment but know how they need to improve if they want to claim alignment for future reporting.”
With the first year out of the way, firms will have their baseline established and can work on making improvements. The most important advice Christensen offered was that all companies should adopt a proactive approach to the EU Taxonomy. When onboarding new subsidiaries, stating new projects or acquiring new real estate, the firm should screen and analyse for taxonomy eligibility so they can align from the beginning, rather than doing it retroactively.
Position Green has built a Taxonomy Solution to help firms throughout their alignment processes, from identifying eligible activities to calculating the financial KPIs for turnover and creating the final report.
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