The European Union (EU) has taken the lead in creating policies and regulations that support sustainable development. One such regulation is the EU Taxonomy Regulation, a classification system for guiding investors, companies, and policymakers to identify environmentally sustainable economic activities. This regulation was formulated after getting inputs from a dedicated expert group called the Platform on Sustainable Finance (PSF).
Essentially, the EU Taxonomy uses a set of Technical Screening Criteria (TSC) to identify eligible economic activities that contribute towards a sustainable environment. The idea behind this regulation is to redirect capital flows towards sustainable economic activities, with the eventual goal of meeting the Paris Climate Agreement.
Though compliance with EU Taxonomy is voluntary, other pieces of EU legislation require the mandatory disclosure of Taxonomy-alignment activities. In this sense, meeting the EU Taxonomy requirements becomes an indirect responsibility for companies.
In this article, we’ll discuss the challenges for companies from these requirements and how you can best handle them.
The EU Taxonomy in a Nutshell
The EU Taxonomy regulation includes all the economic activities that meet the following six environmental objectives:
- Climate change mitigation.
- Climate change adaptation.
- Sustainable use and protection of water and marine resources.
- Transition to a circular economy.
- Pollution prevention and control.
- Protection and restoration of biodiversity.
An economic activity must contribute significantly to one or more of the above criteria without significantly harming others while ensuring the minimum acceptable social standards.
Key Challenges for Companies
Though EU Taxonomy Regulations are voluntary, there are financial implications for adherence. This is why organizations, especially those in energy, transport, manufacturing, and buildings, are likely to follow these regulations. However, implementing these environment-friendly activities is not easy due to the following challenges.
Complex Criteria and Reporting
The EU Taxonomy Regulations are still evolving, and the Commission is requesting inputs and feedback from the companies implementing it. Using this feedback, the Commission plans to ease the compliance process. As this is a work in progress, there are uncertainties surrounding the criteria.
Moreover, the Taxonomy’s criteria are complex. Each of the six objectives has specific technical screening criteria that must be met. For example, climate change mitigation involves criteria like reducing greenhouse gas emissions and increasing renewable energy usage. Companies must navigate these detailed requirements, which often necessitate significant data collection and reporting efforts.
Data Availability and Quality
Accurate data is necessary for demonstrating compliance with the Taxonomy. However, many companies struggle with data gaps, especially in areas like supply chain emissions or environmental impact assessments. Ensuring the quality and reliability of this data adds another layer of difficulty.
Integration with Existing Frameworks
Many companies already follow various Environmental, Social, and Governance (ESG) frameworks, like the Global Reporting Initiative (GRI) or the Task Force on Climate-related Financial Disclosures (TCFD). Aligning these frameworks with the EU Taxonomy can be challenging due to differences in scope, metrics, and reporting standards.
Despite these challenges, companies are steadily including EU Taxonomy as a part of their compliance because of its current and potential future benefits.
Strategies for Compliance
As an organization, here are some things you can do to meet the EU Taxonomy requirements.
Improve Data Management
As discussed in the challenges, capturing relevant data and analyzing them for meaningful insights is challenging because the EU Taxonomy is still in the nascent stages. This is why it’s important to focus on robust data management systems. This involves investing in technology that can collect, store, and analyze environmental data effectively. Many businesses are turning to advanced software solutions that integrate various data sources and provide real-time analytics.
For example, Siemens has developed an integrated data platform that combines information from its operations, supply chain, and external sources to assess its environmental impact comprehensively. Such platforms help track performance against Taxonomy criteria and identify areas for improvement.
Cross-Functional Collaboration
Compliance with the EU Taxonomy requires collaboration across different departments, including finance, sustainability, legal, and operations. Forming cross-functional teams ensures that all aspects of your company’s activities are considered and aligned with the Taxonomy’s requirements. These teams can work together to interpret the criteria, gather necessary data, and implement changes across the organization.
Engage the Stakeholders
Transparent communication with stakeholders, including investors, customers, and regulators, makes meeting the EU Taxonomy requirements easy. While communicating, clearly articulate the sustainability strategies of an economic activity and how it aligns with the Taxonomy. Furthermore, regular updates and reports can build trust and demonstrate commitment to sustainability.
Unilever, for example, has published detailed reports on its progress towards meeting the EU Taxonomy criteria, providing transparency and accountability to its stakeholders. This approach ensures compliance and enhances the company’s reputation and attractiveness to sustainable investors.
Leverage Third-Party Expertise
Take help from external experts specializing in ESG and sustainability to navigate the complexities of the EU Taxonomy. These consultants can provide valuable insights and guidance on compliance strategies. They can also assist with data collection, impact assessments, and reporting, ensuring you meet these stringent requirements.
Focus on Continuous Improvement
Meeting the EU Taxonomy requirements is not a one-time effort but a continuous process. This means you must regularly review and update your sustainability practices to stay compliant. This involves setting clear targets, monitoring progress, and making necessary adjustments. Continuous improvement ensures that you meet current requirements and are prepared for future regulatory changes.
Thus, these proven strategies can help you comply with the EU Taxonomy.
Next, let’s look at a few companies that have successfully made EU Taxonomy a part of their operations, including reporting and compliance.
Case Studies
Orsted
Orsted is a Danish renewable energy company. It made significant investments in offshore wind energy to meet the EU taxonomy requirements, which directly contributes to the climate change mitigation objective. Orsted has also enhanced its data management systems to track its environmental impact and ensure compliance with the Taxonomy’s criteria. As a result, the taxonomy-aligned share of its revenue was 73% in 2022, while the EBITDA and CAPEX were at 85% and 99% respectively.
Schneider Electric
Schneider Electric, a global energy management and automation company, has taken a comprehensive approach to meet the EU Taxonomy requirements. This company has implemented advanced data analytics tools to monitor and report its sustainability performance. Schneider Electric also engages with stakeholders through transparent reporting and communication, demonstrating its commitment to sustainability. These efforts have helped the company align its operations with the EU Taxonomy and enhance its reputation as a sustainable business leader.
These case studies provide a glimpse into how different organizations strategize to meet the EU Taxonomy requirements.
Final Thoughts
The EU Taxonomy is a progressive regulation that focuses on sustainability and tackling climate change. Though its criteria are complex and demanding, it also provides organizations with a clear framework for advancing sustainability. You can proactively address these requirements to ensure compliance while gaining a competitive edge in sustainability.
In this guide, we talked about the prevailing challenges and strategies to overcome them. We also discussed how different companies are meeting these requirements. Using this information, you can formulate sustainability strategies that will help you gain EU Taxonomy’s benefits.