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Complying With EU Taxonomy Regulations to Enhance Risk Management

Findings.co discusses how to comply and leverage the eu taxonomy to enhance risk management efforts

In today’s fast-paced regulatory landscape, businesses face the daunting task of complying with new regulations all the time. Recently, organizations have been faced with dealing with the EU Taxonomy regulations. With an increasing demand for sustainable practices and transparent reporting, organizations need to learn and adapt quickly to avoid falling behind their competitors. Leveraging the EU Taxonomy in risk management can drive data-driven decision making by providing a structured framework to assess and manage sustainability-related risks and opportunities.

The constantly evolving regulatory environment has made Taxonomy compliance a critical challenge for businesses. To meet investor expectations, consumer preferences, and regulatory requirements, organizations must navigate through complex sustainability criteria and efficiently report their compliance efforts. Make sure to read on to see how Findings can help – especially when it comes to staying compliant with the EU Taxonomy Regulation.


Understanding the Regulatory Demands

The EU Taxonomy sets guidelines and criteria for determining the environmental sustainability of economic activities. Compliance with this regulation is critical for many businesses operating within the European Union, aiming to foster a greener and more sustainable economy. These significant updates and changes will impact the way businesses assess and report their sustainability practices. It is crucial for organizations to understand these updates, ensuring compliance while mitigating the risk of penalties and reputational harm.

Leveraging Risk Management for Data Driven Decision Making

By implementing a robust risk management framework revolving around taxonomy, organizations can stay ahead and ensure compliance. Leveraging the EU Taxonomy in risk management drives data-driven decision making by providing a standardized and science-based framework to assess sustainability risks and opportunities. By integrating financial and sustainability data, companies can make informed choices that align with the EU’s environmental objectives, attract green investments, and proactively respond to changing regulatory landscapes.

Here are some of the key ways taxonomy can influence data driven decision making:

  1. Identifying Taxonomy-Eligible Activities: The first step in using Taxonomy for risk management is to identify the company’s Taxonomy-eligible activities. By mapping all activities against the Taxonomy’s criteria, businesses can determine which of their operations contribute to environmental sustainability. This helps in recognizing areas where the company aligns with the EU’s sustainability goals and where there may be potential risks due to misalignment.


  1. Environmental Risk Assessment: With the Taxonomy’s defined criteria for environmental sustainability, businesses can conduct a more rigorous environmental risk assessment. This assessment will go beyond traditional financial risks to include the evaluation of ecological impacts. It allows companies to identify areas where they might face future regulatory or reputational risks due to non-compliance or unsustainable practices.



  1. Data-Driven Eligibility and Alignment Scoring: The Taxonomy requires companies to link their financial data to sustainability assessments. This means companies need to gather data on their operations and expenditures related to Taxonomy-eligible activities. By collecting and analyzing this data, businesses can score their eligibility and alignment with the Taxonomy’s environmental objectives. Data-driven scoring provides a more objective and transparent view of a company’s sustainability performance.



  1. Risk Mitigation Strategies: Armed with data on eligibility and alignment, companies can develop risk mitigation strategies. For instance, they can focus on increasing investments and efforts in Taxonomy-aligned activities, which not only contribute to sustainability but also enhance their attractiveness to green investors. Simultaneously, they can work on transitioning away from activities that are not aligned with the Taxonomy to reduce exposure to future risks.



  1. Regulatory Compliance: The EU Taxonomy is likely to expand to cover more sectors and objectives in the future. By leveraging the Taxonomy in risk management, companies can proactively prepare for upcoming regulatory changes. They can stay ahead of the curve by identifying potential future Taxonomy-eligible activities and aligning their strategies accordingly. Findings recently announced two features, Assessment AI and Audit AI, which revolutionize the labor-intensive compliance landscape by enhancing efficiency and responsiveness for all stakeholders worldwide. For more in-depth information that’s easy to digest, check out the linked videos.



  1. Reporting and Transparency: Using the Taxonomy for risk management facilitates better reporting and transparency. Companies can disclose their Taxonomy-aligned activities, eligibility scores, and risk mitigation strategies in their sustainability reports. This enhances credibility and helps investors and stakeholders make informed decisions based on reliable data

  1. Continuous Improvement: The data-driven approach to Taxonomy integration allows companies to track their progress over time. By regularly assessing their eligibility and alignment, businesses can set benchmarks, monitor improvements, and continuously optimize their sustainability efforts.

By implementing a comprehensive Taxonomy risk management framework and leveraging Findings, organizations can proactively address the challenges posed by the EU Taxonomy regulation. This approach ensures compliance, mitigates risks, and unlocks opportunities for sustainable growth and competitive advantage. With automated risk identification and mitigation features, organizations can confidently make data-driven decisions while navigating the complex regulatory landscape, reinforcing their commitment to sustainability. Stay ahead, embrace Taxonomy risk management, and shape a sustainable future for your organization.

 

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An Introduction to the EU Taxonomy Regulation

An explanation of what is the eu taxonomy regulation?

In Brief:

  • The EU Commission introduced the Action Plan on Sustainable Finance in 2018 to guide investments towards sustainable projects and fulfill climate and energy targets.

  • The EU Taxonomy Regulation was implemented as part of the Action Plan to establish a universal terminology and classification system for sustainable economic activities.

  • The Taxonomy Regulation defines six environmental objectives, including climate change mitigation, circular economy transition, and biodiversity protection.

  • The Taxonomy Regulation imposes reporting obligations on certain entities, amending the Non-Financial Reporting Directive and the Sustainable Finance Disclosure Regulation.

In March 2018, the EU Commission introduced the “Action Plan on Sustainable Finance” with the objective of guiding investments towards sustainable projects and endeavors. One of its main purposes The goal is to reach a climate-neutral economy in the EU by 2050, with a reduction of 55% already implemented in 2030.was to fulfill the goals outlined in the European Green Deal. The initial key step of this plan involved establishing a universal terminology and precise definition for activities that can be deemed “sustainable” in the economic realm. In pursuit of this objective, the EU Commission implemented a classification system known as the “Taxonomy Regulation” or “EU Taxonomy.” This system provides a comprehensive list of economically sustainable activities that align with the six environmental objectives specified by the Commission: climate change mitigation, climate change adaptation, preservation and responsible use of water and marine resources, transition to a circular economy, prevention and control of pollution, and protection and restoration of biodiversity.


Simplifying the EU Taxonomy

With its extensive document spanning hundreds of pages, the EU Taxonomy Regulation might appear intimidating at first glance. However, understanding its core concepts is essential. At its core, the Taxonomy serves as a classification system for economic activities, defining which activities are considered environmentally sustainable. It addresses the issue of greenwashing by enabling market participants to confidently identify and invest in sustainable assets. Additionally, the regulation introduces new disclosure obligations related to the Taxonomy for companies and financial market participants. Central to the Taxonomy Regulation is the definition of a sustainable economic activity. To qualify as sustainable, an activity must meet two criteria: contribute to at least one of the six environmental objectives outlined in the Taxonomy and avoid significant harm to any other objectives, while respecting human rights and labor standards.

 
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Taxonomy Reporting Requirements

While primarily serving as a classification tool, the Taxonomy Regulation imposes reporting obligations on certain entities. It amends the disclosure requirements in the EU’s Non-Financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR).

Under the NFRD, non-financial undertakings must disclose the proportion of turnover derived from Taxonomy activities, as well as the proportion of their capital and operating expenditure associated with these activities (Article 8 disclosure). The proposed Corporate Sustainability Reporting Directive (CSRD) will expand this requirement to a broader list of entities.

The SFDR requires entities falling under its scope to disclose information on the alignment of their products with the Taxonomy. This includes products with sustainable investment objectives (Article 9 SFDR) and those with environmental or social characteristics (Article 8 SFDR). Entities that do not consider the EU criteria for environmentally sustainable activities must make a statement to that effect (Article 7 SFDR).

 

Strategic Preparation for a Greener Future

The EU Taxonomy Regulation is a vital tool in driving the transition to a sustainable economy and achieving climate neutrality. By providing clarity on sustainable economic activities, it helps combat greenwashing and encourages investments in environmentally friendly assets. As the Taxonomy evolves and becomes integrated into various policy measures, its impact on financial markets and corporate practices will likely expand. Staying informed about the Taxonomy and its reporting requirements will be crucial for businesses and investors seeking to align with sustainable objectives and contribute to a low-carbon future.

As companies prepare to meet the EU Taxonomy requirements, they can benefit from early preparation, including eligibility assessments, alignment analyses, and designing data collection processes. By embracing these measures, companies can position themselves as drivers of sustainable change and contribute substantially to the EU’s environmental objectives.

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