In the first months of 2023, we will already start seeing 2022 annual reports published by large European companies about their taxonomy alignment.
In this article, we will explain what EU Taxonomy is, and, most importantly, how FMPs can prepare to start making use of this data for their sustainability reporting and overall investment strategy.
What is the EU Taxonomy?
The EU Taxonomy is a framework defined by the European Union for sustainable economic activities. The regulation aims to help companies and investors shift to a low-carbon, resilient and resource-efficient economy by directing their capital toward sustainable options.
Think of it as a dictionary in which you can look up the economic activity of your choice, and find information about the criteria and thresholds needed for the activity to be considered environmentally sustainable.
To be considered sustainable, an economic activity has to make a “substantial contribution” to one of six objectives, plus “do no significant harm” (DNSH) to all of the other five objectives. The objectives are:
1) climate change mitigation
2) climate change adaptation
3) protection of water and marine sources
4) transition to circular economy
5) pollution prevention and control
6) protection of biodiversity and ecosystems
Finally, the activity also needs to follow the “minimum social safeguards”.
How does the EU Taxonomy prevent greenwashing?
In addition to providing specified criteria of what can be considered environmentally sustainable, the taxonomy also enforces transparency in the market. Companies will need to disclose how much of their activities fall under the taxonomy screening criteria, which is called taxonomy eligibility. Some examples of activities are “construction of new buildings”, and “installation, maintenance, and repair of energy efficiency equipment”.
The eligible activities are then assessed against the technical screening criteria for “substantial contribution”, “DNSH”, and “minimum safeguards”. If all criteria are fulfilled, the activity can be considered aligned with the taxonomy.
Companies must disclose eligibility and alignment as a percentage of their total turnover, OpEx, and CapEx. Financial institutions will respectively need to report eligibility and alignment for their assets and investments, in aggregated calculations.
What are the deadlines for the EU Taxonomy reports?
Large EU corporations will report eligibility and alignment ratios for the financial year 2022.
Financial institutions will need to report only eligibility for 2022. They will have to disclose both eligibility and alignment one year after the corporations - therefore, for the financial year of 2023.
What do FMPs need to consider in order to get ready for the EU Taxonomy?
The EU Taxonomy ratios are among the many new requirements for the sustainability reporting of European financial institutions, and with the regulation being both new and complex, the capital market has struggled to get its hands on the information necessary to fulfill its reporting requirements.
So the most pressing question for FMPs as of now is: how to aggregate data of your investments for your taxonomy report?
Thankfully there is yet another European directive that will increase the scope of companies to report on their taxonomy eligibility and alignment. It is called “Corporate Sustainability Reporting Directive” (CSRD). But, as of now, only large EU companies are under the obligation to report on eligibility and alignment, which in turn results in low data availability.
Nevertheless, until awaiting the CSRD, FMPs will still need to collect, assess and aggregate data from their counterparts in order to report on their eligibility and alignment. As one could imagine, that is probably easier said than done.
In order to automatically aggregate all data already available and simplify the calculations, you might need a platform such as Datia.
How Datia can help
Datia helps you make calculations for the taxonomy eligibility and alignment reports. In the platform, you can quickly overview the percentage of eligibility and alignment of your portfolio. You can also analyze each individual investment in light of their taxonomy eligibility and alignment.