The second year of implementation has confirmed the findings from last year’s report: companies continue to face many challenges in implementing the regulation.
These challenges not only stem from the new requirement for nonfinancial undertakings to report the proportion of taxonomy-aligned activities in relation to their turnover, CapEx and OpEx — in addition to the taxonomy-eligible data — but, more important, from the difficulty of interpreting certain criteria and collecting the technical and specific data and information needed for the alignment assessments.
To address interpretive issues, the EU published two draft Commission Notices in December 2022 that provide answers to frequently asked questions related to the disclosure requirements under Article 8 (“Disclosures Delegated Act”) and the Climate Delegated Act, respectively.
Key examples of the challenges companies face include:
- Complex KPI disclosure template: companies faced some challenges related to the amount of information required for each KPI and to the compilation of a complex table. This resulted in the need for more guidance and led to interpretational uncertainties and low readability, which could affect the comparability of data across the EU.
- Continued room for interpretation: despite the Commission Notices, uncertainties persisted regarding the interpretation of certain aspects of the Taxonomy Regulation.
- Compliance with technical screening criteria: the introduction of alignment reporting added complexity, and some undertakings were not adequately prepared to provide the required information because as it was often not available in the required level of detail.
- Minimum safeguards: the requirement of Article 18 of the Regulation has led to several interpretative doubts about what should be considered a “minimum” in terms of safeguards.
The regulation is expected to further evolve over the next few years. The recently adopted Delegated Regulations will add new activities to the list of those that can make a significant contribution to one of the six environmental objectives, increasing the proportion of activities that are potentially taxonomy-eligible and taxonomy-aligned. These changes will allow for the inclusion of some additional sectors, such as the manufacture of plastic packaging goods or sale of second- hand goods, that are currently excluded from the EU Taxonomy. Meanwhile, these changes will also require companies to conduct periodic assessments to reflect regulatory changes.
In preparation for the additional requirements that should come into effect in the next few years, it is important to anticipate and prepare for what comes “next” and “beyond.”
These expansions reflect the evolving nature of the taxonomy framework, which is expected to progressively incorporate additional activities that could qualify as contributing substantially to one of the six environmental objectives.
Lastly, according to the recently approved Environmental Delegated Act companies will only be required to report their taxonomy eligibility for the additional activities starting from 1 January 2024. Thus, starting from FY25, both taxonomy eligibility and alignment will be required to be reported for the companies within the scope of the regulation for all the six environmental objectives.
To this regard, the CSRD, approved by the EU Council and EU Parliament in November 2022, explicitly requires companies falling within the scope of the CSRD to include the Taxonomy disclosure within their sustainability statements.
Organizations can navigate the complex new regulatory framework by developing reporting criteria, systems and controls. Steps to map out will include:
- Mapping the financial data required to calculate the three KPIs required by the EU Taxonomy Regulation (CapEx, OpEx, turnover) and design data collection processes and controls.
- Mapping of the eligible activities according to the Climate and Environmental Delegated Acts.
- Translating regulatory requirements into information that your organization can manage with your current systems.
- Diagnosing the available data in different business units, sites, and functions to identify gaps and alternative solutions.
- Establishing the methodology and considerations for reporting and calculating the appropriate KPIs.
- Studying financial systems and financial data extraction, and test traceability with financial information through sampling of activities.
- Performing the extraction of the data at the end of the fiscal year, process it to calculate the corresponding KPIs and obtain the necessary explanations for the qualitative information required by the regulation.
- Conducting an assessment of the alignment of each eligible economic activity through a three-step test and gap analysis.
- Defining an action plan to upgrade taxonomy-eligible activities to taxonomy-aligned in the future years
- Implementing updated processes, consolidate the data and information collected, and draft the Taxonomy disclosure to be included in the nonfinancial report.