Exploring the scope of the EU Taxonomy Barometer study
Research captured the disclosure practice adoptions of nearly 90% of EU GDP.
The EY EU Taxonomy Barometer provides an overview of the disclosure practices adopted by companies in the EU and examines the results of the first year of application of the Regulation. Due to the high levels of complexity and uncertainty in the application of the legislation, the study also explores trends and differences between sectors, where eligibility can vary significantly.
To understand how each undertaking complied with Taxonomy Regulation requirements during the first year of application, the EY team focused on a list of countries that represent approximately 86% of EU Gross Domestic Product (GDP). Their work analyzed the most relevant European companies in terms of capitalization, that are listed in Europe’s main stock markets.
This is a chart showing that the sample size of the companies analyzed comprises 41 financial undertakings and 204 nonfinancial undertakings.
The results of the study are based on information collected through the analysis of Taxonomy disclosures published between 1 January 2022 and 30 April 2022 by the sampled companies in either annual reports or nonfinancial reports. The research focused on the analysis of both mandatory and voluntary (e.g., additional KPIs) quantitative and qualitative information reported. In addition, results were analyzed at both the consolidated and industry levels to highlight common practices and key differences.
In-depth country- and sector-specific analyses were conducted for 11 EU countries and 11 sectors (download the full report for more details).
The EU Taxonomy report’s key findings
A majority of the companies in scope disclosed eligibility for turnover, CapEx and OpEx.
As the EU works to transform into a modern, resource-efficient and competitive economy with zero net greenhouse gas emissions by 2050, the Taxonomy Regulation will become more and more critical to business KPIs. However, results from the first EY EU Taxonomy Barometer found there are plenty of opportunities to improve and clarify both information gathering and the process itself.
The findings reveal that 93% of companies in scope of this research have disclosed some eligibility for sustainable turnover, CapEx or OpEx.
This is a chart showing averages for eligible turnover, CapEx and OpEx with CapEx being the highest of the three eligibility KPIs at 35%.
Although the level of eligibility varies widely across the industries analyzed, the research shows that turnover is the least eligible of the three KPIs, with only 27% of companies’ turnover eligible on average. This indicates that the majority of companies’ activities on the main stock markets in Europe are reported as non-eligible and, therefore, do not have the potential to contribute substantially to climate change mitigation or adaptation goals. The companies with the highest eligibility are found in the sectors of construction, infrastructure and real estate, mining and quarrying, power and utilities, and mobility.
However, the average eligibility varies greatly from country to country. This is due to the sectors in which the companies listed in the respective stock exchange markets operate (see graph below).
This is a chart showing the average turnover eligibility by country, with Austria leading at 40% followed by Finland at 39%. The overall average is 27%.
CapEx eligibility averages 35%, which is higher than the average turnover eligibility and the highest of all three KPIs. This is likely due to the fact that, in addition to the capital expenditure associated to eligible turnover, companies may also report the investments related to the purchase of Taxonomy-eligible output as eligible. This may be the case, for example, for measures leading to a greenhouse gas reduction, such as activities 7.2 — Renovation of existing buildings and 7.3 — Installation, maintenance and repair of energy efficiency equipment.
This is a chart showing the average turnover eligibility for each sector, with construction, infrastructure and real estate leading at 58%, followed by mining and quarrying at 57%. The total average eligible turnover is 27%.
For OpEx, the average eligibility is more closely aligned with turnover than with CapEx, averaging 28%. This could indicate that OpEx is more relevant to expenditures related to eligible turnover than CapEx. It could also suggest that OpEx, as per the Regulation definition, is not relevant to many organizations’ business models, as 14% of companies3 used the materiality exemption4.
This is a chart showing the average OpEx eligibility for each sector, with mining and quarrying tied with power and utilities in the lead at 59%. The overall average is 28%.
Where does the industry reporting go from here?
Companies have taken huge steps toward comprehensive disclosures, but guidance is still needed.
This first year of implementation was the occasion for finance and sustainability departments to cooperate and jointly produce the requested information, setting the ground for the future of sustainability reporting.
Despite the simplified way of implementation of the EU Taxonomy, companies faced a real challenge to comply with the Regulation, because of the complexity to correctly interpret some concepts and criteria. Moreover, according to what the EU Commission declared, the EU Taxonomy will evolve, and the delegated acts will be integrated progressively, in order to include all the activities with the potential to contribute to the six environmental objectives.
Organizations faced four key challenges during the first year of reporting:
- Short time frame: the EU Taxonomy regulations were finally issued not before June 2021. The Delegated Act on Article 8 C (2021) 4987 was finally issued on 6 July 2021, the Annexes 1 and 2 to the Delegated Act C (2021) 2800 were finally issued on 4 June 2021.
- Lack of suitable processes: processes for identifying, assessing and reporting on the economic activities had to be set up in the short-term.
- Difficulty of information sourcing: although the EU Taxonomy required only the eligibility reporting for the disclosures in 2022, the required information to be reported was not always directly available and needed to be determined via additional information generated in the system or requested in a manual process.
- Room for interpretation: the regulatory documents of the EU Taxonomy partially have shown far-reaching scope for interpretation, so questions arose regarding the interpretation of the regulatory requirements.
This first year of implementation was the occasion for finance and sustainability departments to cooperate and jointly produce the requested information, setting the ground for the future of sustainability reporting. It was a good first step, but also illustrated the complexity for organizations to report on and have sustainable impact.
Overall, the production of the first Taxonomy reporting revealed that some eligibility and alignment criteria are not precise enough to ensure a standardized approach within a sector. The EU Commission’s FAQs and the interpretation notice published in early 2022 began to address this issue. However, more guidance is needed, both on the disclosure methodology and on the technical criteria interpretation.
If your company is directly or indirectly affected by the EU Taxonomy you should prepare early for the requirements, e.g., by:
- Conducting an eligibility assessment to gain a comprehensive understanding of the economic activities performed and determine which of them may be considered "eligible" under the Taxonomy Regulation Delegated Acts
- Conducting an assessment of the alignment of each eligible economic activity through a three-step test and gap analysis
- Mapping the financial data required to calculate the three KPIs required by the EU Taxonomy Regulation (CapEx, OpEx, Turnover) and designing data collection processes and controls
- Implementing updated processes, consolidating the data and information collected, and drafting the Taxonomy disclosure to be included in the nonfinancial report
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- As further detailed in Del. Reg. 2021/2178. (https://eur-lex.europa.eu/legal-content/IT/TXT/?uri=CELEX:32021R2178).
- Listed companies of main indexes of 11 EU countries representing approximately 86% of EU GDP.
- These companies have been counted as zero for the averages.
- Annex I of the Commission Delegated Act 2021/2178, par. 22.214.171.124
As the EU works to transform into a modern, resource-efficient and competitive economy with zero net greenhouse gas emissions by 2050, the Taxonomy Regulation will become more and more critical to business KPIs.
Results from the first EY EU Taxonomy Barometer found there are plenty of opportunities to improve and clarify both information gathering and the process itself to identify organizations’ activities that contribute toward the EU environmental objectives.