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New interpretation and guidance on screening criteria and reporting

On Monday 19.12 the EU Commission published two draft Commission Notices, one providing interpretation and implementation guidance on the EU Taxonomy Climate Delegated Act and one providing interpretation and implementation guidance on the Disclosures Delegated Act.

The Commission Notices complements previous guidance provided on reporting of Taxonomy-eligible economic activities and an earlier Commission Notice on the Disclosures delegated act. While the previous guidance focused attention on Taxonomy-eligible activities, the new drafts focus on the application of the technical screening criteria and reporting Taxonomy-aligned economic activities. The aim of the new documents is to clarify the existing provisions, but do not expand or add additional requirements.

Draft Commission

Draft Commission Notice on the interpretation and implementation of certain legal provisions of the EU Taxonomy Disclosures Delegated Act

The Commission Notice on the Disclosures Delegated act answers FAQs and aims to assist non-financial companies with the reporting requirements under the Disclosures Delegated Act. Topics covered include general questions and questions on the turnover KPI, the capex KPI and the opex KPI specifically. General questions cover for example reporting on activities under the Complementary Climate Delegated Act (nuclear energy and fossil gas), the impact of CSRD, accounting for “double-counting”, and consolidation of KPIs on group level.

Do you want to learn more about the EU Taxonomy?

Read our FAQ about EU Taxonomy here.

Sustainability reporting in Europe – All you need to know

Every year sustainability reporting in Europe for companies operating in the European Union accelerates. Below you can read the key points of corporate sustainability reporting that are valid today and in the future.

EU Green Deal

Climate change and biodiversity degradation pose a threat to Europe and the world. To prevent aggravating climate change further and to overcome the challenges caused by climate change and biodiversity loss, the European Union established a European Green Deal.

The EU Green Deal’s short-term goals are:

  • Europe to be the first climate-neutral continent by 2050
  • Cut greenhouse gas emissions by 55% compared to 1990-levels
  • 3 billion trees planted in the EU by 2030

In the long term the Green Deal aims to transform the EU into a modern, resource-efficient and competitive economy, ensuring:

  • no net emissions of greenhouse gases by 2050
  • economic growth decoupled from resource use
  • no person and no place is left behind

Corporate Sustainability Reporting in Europe

Under EU law large companies are obligated to report annually on company operations and how a company manages social and environmental challenges. The sustainability reporting regulations help to direct financing towards sustainable companies and activities, supporting the EU Green Deal goals for 2030 and 2050.

A key contribution to achieving the European Green Deal goals is to improve the data on the sustainability risks companies are exposed to and their impact on people and the environment. Improved data requires improved and mandatory corporate reporting on these issues.

Today, approximately 12000 public-listed companies are required to report, however, by 2027 over 50 000 companies will be impacted by European sustainability standards under the Corporate Sustainability Reporting Directive (CSRD).

  • All large companies (stock market lister or not) will have to adhere to the European sustainability standards, already reporting companies from 2025 and large companies currently not reporting from 2026.
  • Listed SMEs will have time until 2027 to adapt to coming reporting standards and requirements.
  • The reporting requirements will also cover companies with headquarters outside the EU with over 150€ million in turnover in the EU from 2029.

European sustainability reporting standards

The European Sustainability Reporting Standards (ESRS) specify the obligations of the Corporate Sustainability Reporting Directive (CSRD).

The ESRS define the minimum level of mandatory corporate responsibility information for companies. All companies report in addition to the general principles related to sustainable business operations:

  • strategy and business model
  • sustainability effects
  • sustainability risks and opportunities.

The standards were prepared with the choices of various stakeholders, the European financial reporting advisory group EFRAG in November the second set of EU sustainability reporting standards. Based on these 12 standard drafts, the commission will publish this standard in the summer of 2023. Read more here.

Mandatory reporting requirements

In 2023, the first round of full EU taxonomy reporting was required from companies reporting under the NFRD. From 2024 onwards, the scope of the EU taxonomy will expand as the Corporate Sustainability Reporting Directive (CSRD) is implemented, requiring more and more companies to include EU Taxonomy information in their sustainability reporting.

Corporate Sustainability Reporting Directive (CSRD)

With CSRD reporting, a larger part of companies operating in the EU will be covered by taxonomy reporting, and in addition, companies must publish more detailed information in connection with their activity report, e.g., about the environmental and social impacts of their business.

The CSRD scope:

  • Starting from 1 January 2024, all listed companies that employ more than 500 people (i.e. those that are already covered by the NFRD and are obliged to prepare a statement of non-financial information and to publish information according to the EU taxonomy).
  • From January 1, 2025, listed and unlisted companies with more than 250 employees and more than €40 M in turnover.
  • SMEs listed from 1 January 2026.
  • Third-country companies with net turnover above 150 million in the EU from 1 January 2029.

5 steps to prepare for CSRD – read more here

EU Taxonomy

EU taxonomy is part of the EU Green Deal, which aims to promote the EU carbon neutrality targets by 2050. EU taxonomy requires companies to classify their environmentally sustainable activities and investments. The aim of the Taxonomy is to get the financial market to direct investments towards more environmentally sustainable solutions.

As of January 2023, companies must assess the sustainability of their economic activities. This must happen in accordance with the technical screening criteria for the EU taxonomy climate goals.

EU Taxonomy in a nutshell – Read more here.

EU’s Directive on Corporate Sustainability Due Diligence (CSDD)

In February 2022, the European Commission proposed a Directive on corporate sustainability due diligence (CSDD). CSDD places companies with a key role in building a sustainable economy and society in the EU and complements several current sustainability reporting legislation, such as the CSRD, the Sustainable Finance Disclosure Regulation and the EU Taxonomy regulation.

Under the CSDD companies are required to:

  • integrate due diligence into policies;
  • identify actual or potential adverse human rights and environmental impacts;
  • prevent or mitigate potential impacts;
  • bring to an end or minimise actual impacts;
  • establish and maintain a complaints procedure;
  • monitor the effectiveness of the due diligence policy and measures;
  • and publicly communicate on due diligence.
The future of sustainability reporting

As sustainability reporting within Europe continues to develop, the legal and mandatory reporting requirements and due diligence work within the EU will increase. The EU aims to set a global standard for sustainability work and key features of sustainability reporting will have an impact outside the EU, encouraging the rest of the world to follow suit.

European countries outside the EU will most probably incorporate, or at least benefit from voluntary reporting from an early stage due to higher market pressure. All third-country companies with EU subsidiaries will have to report sustainability information based on CSRD from 2029, thereby affecting companies also on other continents.

The immediate next steps of future sustainability reporting in Europe include the adaption of the Corporate Due Diligence Directive and the addition of activities under the EU Taxonomy regulation. The EU has high ambitions for setting a legal framework to achieve the goals of the European Green Deal and combat the most threatening sustainability risks that impact our societies today.

Sources

https://www.consilium.europa.eu/en/press/press-releases/2022/11/28/council-gives-final-green-light-to-corporate-sustainability-reporting-directive/

https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145

The European Sustainability Reporting Standards set the minimum level of corporate sustainability information to be reported

The EU sustainability reporting standards (European Sustainability Reporting Standards, ESRS) specify the disclosure obligations of companies in the Corporate Sustainability Reporting Directive (CSRD). CSRD changes corporate sustainability reporting from voluntary to mandatory and at the same time expands and specifies what corporate sustainability information needs to be reported. The CSRD will apply from 2024, after which corporate sustainability data needs to be reported in accordance with the defined elaborate standards. Read more about CSRD here.  

European financial reporting advisory group EFRAG, who prepared the standards together with experts from various stakeholders, finalized the first set of EU sustainability reporting standards in November (2022). Based on the 12 standard drafts, the European Commission will publish the final standards by summer 2023 at the latest.

Cross-cutting, topical and sector-specific standards

The EU’s sustainability reporting standards define the minimum disclosure level of mandatory corporate sustainability information for companies. All companies need to report on general principles related to sustainable business operations, such as:

• Strategy and business model

• Sustainability impacts

• Sustainability risks and opportunities.

In addition, relevant ESG information is reported in accordance with subject-specific sustainability reporting standards related to:

• Environment,

• Social,

• Governance.

Sector-specific sustainability reporting standards are also being prepared. These standards will to describe which ESG matters are relevant for certain industries to report on.

Prepare for reporting according to ESRS 

Corporate sustainability data will eventually be more transparent and easier to compare. It is good to note that several existing sustainability reporting standards and frameworks, such as GRI, SASB, TCFD and CDP, have been taken into account in preparing the ESRS.

This enables reporting companies to utilise their existing practices and more easily standardise the reporting of their sustainability data in accordance with the EU reporting standards. 

The EU’s sustainability reporting obligations and standards are new for everyone, regardless of whether your company is an experienced operator in the field of sustainability or just starting corporate sustainability reporting for the very first time. Ecobio’s experts helps your company to find a suitable road forward taking the new corporate sustainability obligations and sustainability reporting standards into account. 

If you have any questions, please contact our consultant Terhi Valtonen.

 

Terhi  Valtonen

Email: terhi.valtonen@ecobio.fi

Phone: +358 (0)207656144

 

GRI = Global Reporting Initiative  

SASB = Sustainability Accounting Standards Board  

TCFD = Task Force on Climate-Related Financial Disclosures  

CDP = Carbon Disclosure Project 

EU taxonomy in a nutshell

EU taxonomy is part of the EU Green Deal, which aims to promote the EU carbon neutrality targets by 2050. EU taxonomy requires companies to classify their environmentally sustainable activities and investments. The aim of the Taxonomy is to get the financial market to direct investments towards more environmentally sustainable solutions.

EU taxonomy raises uncertainty because the Taxonomy Regulation and its obligations as well as the classification system and reporting are constantly evolving. Therefore, possible effects on your business may change every year.

EU taxonomy – frequently asked questions

What?

EU taxonomy is a classification system for sustainable economic activities. It lists economic activities that significantly contribute to the climate and environmental goals and their evaluation criteria. In practice, EU taxonomy is EU’s sustainability tool based on the Taxonomy Regulation. This allows companies to plan their activities in preparing for the green transition. In addition it also enables them to get financing when moving to a low-carbon and resource-efficient economy.

“EU taxonomy is gradually developing, and it increases companies’ transparency as it requires companies to disclose their sustainability information. Sustainability reporting will be an integral part of companies’ annual reporting in the future, in addition to the traditional financial reporting.” says Terhi Valtonen, Senior sustainability consultant at Ecobio.

To whom?

In addition to financial market participants, the Taxonomy Regulation applies to large companies that annually publish a non-financial statement as part of their management report in accordance with the NFRD (Non-Financial Reporting Directive).

EU taxonomy is constantly developing. Because of this the classification system and reporting requirements will cover many other companies in the future. This will happen when the corporate sustainability reporting directive CSRD becomes applicable and replaces the NFRD.

How?

Companies must identify which of their own economic activities can be classified as sustainable according to EU taxonomy. Companies must screen each activity in accordance with the do-no-significant-harm principle.

A company’s activities can only be sustainable if it does not harm other environmental goals or human rights at the same time. Companies must annually report on how much of their operations are in line with the EU taxonomy’s climate and environmental goals and also disclose the key performance indicators.

“Large, listed companies already publish a non-financial statement, but the relevant sustainability information on company’s operations and its impacts can easily get lost in the pile of annually published reports, unless you know where to search for them. With the help of CSRD we will clearly talk about corporate sustainability reporting in the future.” says Terhi.

When?

The Taxonomy Regulation and its technical criteria for climate goals have been applied since January 2022. Companies affected by this must annually disclose the share of sustainable activities in their turnover, capital expenditures and operating expenditures.

As of January 2023, companies must assess the sustainability of their economic activities. This must happen in accordance with the technical screening criteria for the EU taxonomy climate goals. The EU Commission will publish the remaining environmental objectives and their technical screening criteria in the fall of 2022.

“Companies are advised to start preparing for the EU taxonomy classification and reporting of their sustainable activities in time, because it is a time-consuming process to finally be compliant with EU taxonomy requirements. Your company should also start preparing now.” says Terhi.

Why?

EU taxonomy is a companies’, investors’ and financiers’ sustainability tool, which strict technical screening criteria are based on science. It provides methods that can be used to assess how much of a company’s economic activities that have a significant impact on the climate and environmental goals of the EU Green Deal.

The taxonomy also provides common definitions that allow companies and investors to communicate credibly through their financial numbers about their green and sustainable operations and plans to transition to a low-carbon economy. A common language in sustainability matters is necessary to be able to compare the data and set sustainability goals.

“ EU taxonomy is not only the reporting obligation, but companies can use the taxonomy in integrating the the climate and environmental goals into company’s sustainability strategy and ESG goals.”

-Terhi Valtonen, Senior sustainability consultant, Ecobio

Additionally EU taxonomy serves as a basis for many actions of the EU sustainable finance strategy. For example green bonds, companies’ sustainable business and strategy targets, and reporting of material sustainability data.

Ask Ecobio experts – Contact us below:



    Technical Screening Criteria – environmental objectives

    Technical Screening Criteria – environmental objectives

    Recommendations on the technical screening criteria for the last four environmental objectives

    The Platform on Sustainable Finance recently released its report with recommendations to the EU Commission for the technical screening criteria for the remaining four environmental objectives defined under the EU Taxonomy Regulation (2020/852/EU). The report released on 30 March 2022 will provide the foundation for the upcoming environmental delegated act, although the EU Commission is not obliged to follow the recommendations. The Platform continues its work on the technical screening criteria for a selected set of activities and plans to release the criteria as a separate supplement in May 2022.

    Defined methods and criteria

    The current report details the methodological approach followed by the platform when selecting relevant and prioritised activities for which technical screening criteria should be developed – and formulating the criteria. The report consists of two parts.

    Part A explains the approach of the platform and the methodology followed. It defines the ambition level for each environmental objective and clarifies what a substantial contribution means for each environmental objective. It also explains the consultation process and provides recommendations and reflections for future work.

    Part B lists all the defined activities according to sector and defines the technical screening criteria and the rationale behind the selection of criteria. Note that the EU Commission is not required to follow these requirements.

    The publication of the upcoming delegated act based on these recommendations is expected during Autumn 2022 and to apply from 1.1.2023. According to the Disclosures Delegated Act (2021/2178), companies need to report alignment with the new criteria 12 months after application.

    The report from the Platform follows the recently released reports on the environmental transition taxonomy (29 March 2022) and the social taxonomy (28 February 2022).

    Ecobio’s consulting services for sustainable finance

    Ecobio can help you with interpreting the EU Taxonomy criteria and classify and report taxonomy-related information.

     

    If you have any questions about our taxonomy services, please contact us:



      Ecobio Whitepaper: EU Taxonomy Classification and Reporting in 2022 – Five Steps for Compliance

      Download Ecobio's Free Whitepaper Five Steps to Comply with the Taxonomy Regulation

      Update:

      EU Taxonomy classification and reporting in 2023 – Eight steps to compliance whitepaper available now

      The new whitepaper aims to provide implementation guidance on EU Taxonomy Classification and Reporting requirements valid from 2023. 

      EU Taxonomy classification and reporting in 2023 – Eight steps to compliance whitepaper

      This whitepaper aims to provide implementation guidance on EU Taxonomy Classification and Reporting requirements valid from 2023. The document deals with the actions needed by companies in the non-financial sector. Read the latest whitepaper to learn more about:

      • What is the EU Taxonomy Regulation?
      •  Which companies are required to act now?
      •  Eight steps for compliant EU Taxonomy classification and reporting from 2023

      Click for more here.

      In 2022, the Taxonomy classification and reporting requirements are limited. Non-financial undertakings are required to disclose the share of their turnover, capital, and operational expenditure associated with environmentally sustainable economic activities. Our new whitepaper contains the five steps for compliant EU Taxonomy classification and reporting in 2022.

      The whitepaper provides implementation guidance on EU Taxonomy Classification and Reporting 2022. The document deals with the actions needed in non-financial undertakings. The five-step work pipeline in the whitepaper will help you fulfil the actual Taxonomy requirements in your entity.

      2022 whitepaper covered the topics of:

      • What the EU’s Taxonomy Regulation implicates
      • How your company is affected by Eu taxonomy
      • What the current timeline for the Taxonomy looks like
      • Which requirements apply to your company
      • Five most important steps to meet the Taxonomy Requirements

      This whitepaper is no longer available for download.

      EU Taxonomy classification and reporting in 2022

      The EU Taxonomy Regulation and related statutes direct investments toward sustainable economic activities. They formulate a robust and science-based framework for companies and investors that provides environmental criteria for determining which economic activities substantially contribute to the EU Green Deal objectives.

      The EU Taxonomy Regulation (2020/852/EU) sets technical screening criteria to determine if an economic activity can be considered sustainable for six environmental objectives. Currently, the screening criteria are available for the two objectives: climate change mitigation and climate change adaptation. The screening criteria for the remaining objectives will be published in spring 2022.

      Read more about our EU Taxonomy digital solution here and our sustainable finance consultancy services here.