Tag Archives: CSRD

Why Isn’t Everyone Talking About the EU Taxonomy?

Comply with the EU Taxonomy in 2024 with Findings.co

Despite its far-reaching implications for corporate sustainability, ESG standards, and compliance landscapes, the EU Taxonomy Regulation seems to fly under the radar of mainstream conversations. Why is this groundbreaking framework not the talk of every boardroom and the headline of every business news outlet? Let’s dive into the essence of the EU Taxonomy, its impacts, and the reasons it should be at the forefront of global sustainability discussions.

The EU Taxonomy Explained

The EU Taxonomy is a legally binding classification system developed by the European Commission to direct investments towards sustainable projects. It aims to enhance transparency, prevent greenwashing, and ensure that environmental sustainability is embedded in the heart of financial and economic activities. By defining what constitutes a sustainable economic activity, it mandates financial and non-financial undertakings to disclose how their operations align with specific criteria related to environmental sustainability, covering aspects such as turnover, capital expenditures (CapEx), and operating expenditures (OpEx). The taxonomy represents a framework for categorizing economic activities based on their alignment with a net zero pathway by 2050 and wider environmental objectives beyond climate concerns.

The Current State of Compliance and the Chasm Ahead

The EY EU Taxonomy Barometer 2023 provides illuminating insights into the current state of compliance. While an encouraging 89% of companies report some level of disclosure, the actual alignment with the taxonomy’s objectives is less than 40%. This discrepancy underscores a critical challenge: companies are struggling to fully integrate the taxonomy’s rigorous environmental standards into their operations. The complexities of disclosure requirements, coupled with interpretative uncertainties and the detailed technical analysis required for alignment assessments, present formidable hurdles.

Despite these challenges, the benefits of adopting the EU Taxonomy are manifold. Beyond compliance, alignment with the taxonomy fosters improved transparency, access to green financing, enhanced reputation, and opportunities for value creation and employee retention. Yet, as the research analyzing 320 companies across various EU countries and sectors indicates, there is a significant variation in the levels of taxonomy alignment, with certain sectors like power and utilities faring better than others.

Why the Silence?

Given the critical importance of the EU Taxonomy in steering the continent towards sustainability, the lack of widespread discourse is perplexing. Several factors contribute to this silence:

  1. Complexity and Uncertainty: The intricate details and the evolving nature of the taxonomy’s criteria make it a challenging subject for widespread discussion. Businesses are still grappling with understanding and implementing these regulations, leading to a focus on internal compliance efforts rather than external discourse.

  2. Sector-Specific Impacts: The impact of the taxonomy is more pronounced in certain sectors, leading to uneven levels of engagement and discussion across industries. Companies in sectors with clearer pathways to sustainability may find it easier to align and thus more likely to engage in discussions.

  3. Emerging Reporting Requirements: The integration of the Corporate Sustainability Reporting Directive (CSRD) into the taxonomy framework is set to expand the scope of companies required to disclose sustainability information. As companies prepare for these new requirements, the focus may be more on internal readiness rather than public conversation.

  4. Investment and Partnership Implications: The stark reality is that companies with low ESG scores, and by extension, poor alignment with the EU Taxonomy, face significant barriers to investment and partnerships. This looming threat may prompt companies to prioritize internal adjustments over public engagement on the topic.

The Path Forward

The time to talk, act, and lead on the EU Taxonomy is now. The EU Taxonomy is not just another regulatory requirement; it is a pivotal element of the EU’s ambition to become a carbon-neutral continent. It represents a fundamental shift towards embedding sustainability at the core of economic activities. As the taxonomy evolves and expands, companies must not only strive for compliance but also recognize the strategic value of sustainability reporting.

Businesses should embrace the taxonomy as a tool for strategic planning, risk management, and market differentiation. Developing comprehensive reporting strategies, mapping financial data to the taxonomy’s requirements, and establishing robust processes and controls are critical steps in this journey.

Moreover, fostering a broader dialogue about the EU Taxonomy and its implications for global sustainability efforts is essential. By bringing this conversation to the forefront, businesses, policymakers, and stakeholders can collectively navigate the complexities of the taxonomy, leverage its benefits, and drive meaningful progress towards a sustainable future.

ICYMI: Watch the Recording of Our Latest EU Taxonomy Webinar

A Cheat Sheet of EU Sustainability Regulations

Findings.co cheat sheet of EU Sustainability Regulations

Staying Compliant in 2023

Sustainability reporting regulations have become increasingly important for businesses worldwide. The European Union (EU) is at the forefront of this movement, implementing regulations to enhance the consistency, accuracy, and transparency of sustainability reporting. Below, I will provide a comprehensive overview of some of the most critical EU sustainability regulations to keep in mind in 2023. Sustainability measures have become an integral part of business operations, irrespective of the size of the company. Companies can no longer ignore the growing number of sustainability reporting laws and regulations emerging globally. Navigating this complex landscape can be daunting, with terms like SFDR, CSDR, and NFRD, among others. To help you stay informed, I will highlight key EU sustainability regulations that are important to note in 2023.


EU Taxonomy

The EU Taxonomy is a classification system that establishes a list of economic activities considered sustainable. It aims to combat greenwashing and assist investors in selecting environmentally conscious investments. The EU Taxonomy evaluates investments based on their contribution to climate change mitigation and adaptation, alignment with circular economy principles, impact on pollution, and effect on water and biodiversity. Large companies began reporting their alignment with the EU Taxonomy on January 1, 2023. For a more in depth explanation of EU taxonomy, check out our free eGuide below!

 


Sustainability Disclosure Requirements (SDR)

Originating from the UK Financial Conduct Authority (FCA), the Sustainability Disclosure Requirements (SDR) regulation aims to address concerns about greenwashing, where firms make exaggerated or misleading sustainability claims about their investment products, leading to potential consumer harm and reduced trust in sustainable investments. The proposals focus on building transparency and trust by introducing labels to help consumers navigate the market and ensure that sustainability-related terms in product naming and marketing are accurate and proportional to the product’s sustainability profile. The consultation targets FCA-regulated firms, industry groups, consumer groups, policymakers, academics, and other stakeholders. This initiative is part of the FCA’s commitment to promote trust and integrity in ESG-labeled instruments and products as outlined in the ESG Strategy and Business Plan, contributing to the Government’s Roadmap to Sustainable Investing. 


EU Sustainable Finance Disclosure Regulation (SFDR)

The Sustainable Finance Disclosure Regulation (SFDR), implemented by the European Parliament, focuses on enhancing transparency in the sustainable investment market. It aims to prevent misleading environmental claims (greenwashing) and increase investment in sustainable products for a transition to a low-carbon economy. The SFDR categorizes investment products into three groups based on their degree of sustainability. It requires asset managers and investment advisers to disclose how they address Sustainability Risks and Principal Adverse Impacts and the three categories of products go into “Article 6,” “Article 8,” and “Article 9” based on their sustainability considerations. The regulation rolled out in two phases, with core disclosures effective in March 2021 and enhanced disclosures in January 2023. Regulators continue to provide guidance on these disclosures as industry understanding evolves. 


Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive (CSRD) expands on the existing Non-Financial Reporting Directive (NFRD) to address structural weaknesses in current ESG regulations. CSRD came into force on January 5, 2023, requiring approximately 50,000 companies to report on sustainability, including a broader set of large companies and listed SMEs. The new rules aim to provide investors and stakeholders with the necessary information to assess investment risks related to climate change and sustainability issues. 

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS), which will be developed by the EFRAG and tailored to EU policies while aligning with international standardization initiatives. The directive also mandates companies to have their sustainability information audited and introduces digitalization of sustainability information. 

The CSRD will be implemented in the 2024 financial year, and companies will need to comply with the new reporting requirements for reports published in 2025. The European Commission has also opened a public feedback period on draft sustainability reporting standards, considering feedback received before finalizing the standards for scrutiny by the European Parliament and Council. These new regulations represent a significant step towards promoting sustainability and responsible business practices within the EU corporate landscape.


Corporate Sustainability Due Diligence Directive (CSDDD)

The Corporate Sustainability Due Diligence Directive (CSDDD) is a pending EU proposal that will require large EU companies and non-EU companies with large EU undertakings to exercise due diligence across their business lines and value chains. It aims to prevent human rights and environmental violations. The draft proposal was approved by the EU Parliament on June 1, 2023, and negotiations with member states will follow. Due diligence obligations may come into effect as early as 2025.

The rules will apply to specific categories of companies. Firstly, large EU limited liability companies will be affected, categorized into two groups. Group 1 includes approximately 9,400 companies with 500 or more employees and a net turnover of over EUR 150 million worldwide. Group 2 comprises about 3,400 companies operating in high-impact sectors, such as textiles, agriculture, and mineral extraction, with at least 250 employees and a net turnover of over EUR 40 million worldwide. For Group 2, the rules will be applicable two years later than for Group 1. Additionally, non-EU companies will also come under scrutiny. Approximately 2,600 companies in Group 1 and 1,400 in Group 2, active within the EU and generating turnover thresholds aligned with the mentioned criteria, will be subject to the new rules. It’s important to note that micro companies and SMEs will not be directly affected by these proposed rules. However, supporting measures for SMEs will be provided, which may have indirect effects on them.


Streamlined Energy and Carbon Reporting (SECR)

The Streamlined Energy and Carbon Reporting (SECR) policy, introduced by the UK Government, requires organizations to include energy consumption and carbon emission data in their annual reports. It aims to expand reporting to a broader range of companies and promote energy efficiency initiatives to reduce carbon footprints. The SECR applies to large UK companies, including quoted and unquoted companies, as well as limited liability partnerships. The reports must include information on energy use, greenhouse gas emissions, and energy efficiency measures undertaken. 


Circular Economy Action Plan

The Circular Economy Action Plan is an initiative by the European Commission to promote a circular economy, reducing pressure on natural resources, and achieving climate neutrality and biodiversity conservation by 2050. Really, the goal is to make sustainability a norm. The plan aims to strengthen the eco-design of products, increase recycling rates, reduce landfilling, and promote sustainable consumption and production practices. It includes measures such as extended producer responsibility, eco-design requirements, and waste reduction targets. The plan was published in March 2020 and will be implemented gradually over the coming years. To achieve these objectives, the European Commission plans to implement all 35 actions listed in the plan. Additionally, a monitoring framework has been established to assess progress towards a circular economy and its benefits. This framework includes indicators to monitor material efficiency, consumption within planetary boundaries, and support the European Green Deal’s climate neutrality goals.


EU Emissions Trading System (EU ETS)

The EU Emissions Trading System (EU ETS) is a key policy instrument in the EU’s efforts to combat climate change. It is a cap and trade system operating in EU countries, Iceland, Liechtenstein, and Norway. It aims to limit greenhouse gas emissions from various sectors, including the energy industry, manufacturing, aviation, and maritime transport. The system covers approximately 40% of the EU’s total greenhouse gas emissions and is set to include emissions from maritime transport starting in 2024. Under the cap and trade principle, a cap is placed on the total amount of greenhouse gasses that covered operators can emit. This cap is reduced over time to ensure overall emissions decrease. Operators buy or receive emissions allowances within the cap, and they can trade these allowances with others. This creates a market for emissions allowances, encouraging emission reductions and investments in low-carbon technologies. Operators must surrender enough allowances to cover their emissions annually, and failure to do so results in heavy fines. If an operator reduces its emissions, it can keep the extra allowances for future use or sell them to others needing more allowances. 

The EU ETS covers various sectors, including electricity and heat generation, energy-intensive industries like steel and cement production, aviation within the European Economic Area, and maritime transport. Participation is mandatory for certain-sized companies in these sectors, with exceptions for some small installations under certain conditions.


Stay Compliant!

For businesses operating within the European Union, adhering to these sustainability regulations is not only a legal obligation in many cases, but also an opportunity to play a crucial role in building a sustainable and resilient future. Compliance with these regulations is essential to demonstrate a commitment to environmental responsibility, social well-being, and corporate governance best practices. As companies strive to meet these regulatory requirements, it is vital to establish robust systems and processes for accurate and transparent sustainability reporting. By doing so, businesses can effectively manage risks associated with non-compliance, foster trust with stakeholders, and seize the potential advantages of sustainable practices, including increased attractiveness to environmentally conscious investors and consumers.

The regulations discussed in this cheat sheet, including SDR, SFDR, EU Taxonomy, CSRD, CSDDD, SECR, Circular Economy Action Plan, and EU ETS, cover a wide range of environmental, social, and governance aspects. It is important for companies to familiarize themselves with these regulations, and monitor updates. embracing sustainability and staying compliant with the EU’s evolving sustainability regulations is not merely a box-ticking exercise but an ongoing commitment to creating a positive impact on the planet and society. 



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