How US companies can prepare for the demands of EU Taxonomy

Our Taxonomy Barometer, based on the most recent full year of reporting by European Union (EU) companies, shows a disclosure practice that is maturing, though with significant challenges remaining. Qualitative information and supporting rationales are becoming more sophisticated, while quantitative elements are more complete. The usefulness of the disclosures from a strategic perspective varies significantly by sector. 

Five strategic considerations

1. Scope and reporting options:

Non-EU groups have a complex set of scoping and reporting option considerations to work through as they face two sets of scoping requirements with different reporting obligations.

The CSRD and Taxonomy scoping thresholds remain aligned for EU-incorporated entities, the new thresholds being 1,000 employees and EUR450m (assessed independently on a consolidated and standalone basis). Many companies will report on both CSRD and Taxonomy at the global level. However, others may consider a split reporting option structure with European Sustainability Reporting Standards (ESRS) at the global level and Taxonomy at the level of the scoped-in subsidiary (to the extent that is practicable given group structure and number of scoped in entities).

2. Sector by sector:

Taxonomy does not have the same relevance across sectors. For example, manufacturing, power and utilities, and automotive show a range from 40% to over 90% eligibility. Other sectors may see negligible eligibility arising from their core business, with Taxonomy activities only pulling in elements of a company’s sustainability initiatives.

With that sector lens, Taxonomy disclosures are beginning to play a significant role in highlighting a company’s transition trajectory. For example, a company with low green revenue but high green capex is in rapid transition. The financial statement comparability that Taxonomy disclosures provide, by reference to independent sustainability benchmarks, makes the Taxonomy a technical but useful tool in the anti-greenwash toolkit¹. From a policy perspective, regulators are also looking closely at Taxonomy data, using it to track the pace of Europe’s transition across sectors.

3. Cumulative materiality:

Companies are now able to use a robust materiality construct as a result of recent Omnibus amendments. Activities cumulatively representing up to 10% of a KPI can be allocated as immaterial. This allows the company to avoid detailed eligibility and alignment screening and reporting regarding those activities. We’re seeing the importance of using that cumulative 10% strategically. Which activities are of low salience? Which are costly or complex to assess? Which are of limited significance today but a future strategic priority? Companies are looking to use the 10% in a way that allows a focused and efficient effort targeted on activities that matter now and in the future.

4. Prioritize alignment:

Similarly, companies are looking to be strategic in the way they think through their alignment assessments. Many want to address Minimum Safeguards early given reputational considerations and shared benefits with other regulations (such as CSRD reporting and Corporate Sustainability Due Diligence Directive (CSDDD) preparations). They likely want to focus alignment effort on strategic activities where getting to or understanding the path to alignment is important. In relation to other lower-salience activities, companies may look for a “fast to fail” approach to report zero alignment and move on, saving time and resources through a more focused approach.

5. Overall considerations:

In the Barometer, we identify a series of challenges facing companies looking to navigate Taxonomy, many of which may be familiar, including: