The EU taxonomy (Regulation (EU) 2020/852) is a crucial part of the EU's sustainable finance framework, serving as a market transparency tool. It guides investments towards essential economic activities for the transition, aligned with the European Green Deal's goals, including the net-zero trajectory by 2050. The taxonomy classifies economic activities meeting environmental goals, apart from climate, and plays a significant role in achieving the EU's climate and energy targets for 2030.
To ensure investments support sustainable projects, a common definition of 'sustainable' was necessary, leading to the creation of the "EU taxonomy" through the action plan on financing sustainable growth. Financial and non-financial companies can now share a common understanding of environmentally sustainable economic activities, promoting greater investments in sustainability.
The EU Taxonomy, adopted in July 2020, mandates undertakings to disclose their Taxonomy-eligible and Taxonomy-aligned activities. Eligible activities contribute to one of the six environmental objectives (namely climate change mitigation, climate change adaptation, use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity), while aligned activities must be both eligible and environmentally sustainable.
For nonfinancial undertakings, the Regulation requires reporting the share of Taxonomy-aligned activities contributing to turnover, capital expenditures (CapEx), and operating expenditures (OpEx). Financial undertakings must disclose information on the extent to which their activities are Taxonomy-aligned.
While the use of the Taxonomy is mainly optional, Article 8 of the Taxonomy Regulation (Regulation (EU) 2020/852) makes it mandatory for entities currently governed by the Non-Financial Reporting Directive (NFRD), which is being replaced by the Corporate Sustainability Reporting Directive (CSRD), to disclose the eligibility and alignment of their business activities with the Taxonomy.
The Taxonomy Regulation (EU) 2020/852 of June 18, 2020, along with the Delegated Regulation (EU) 2021/2178 of July 6, 2021, issued by the European Commission, specifies the format and content of the disclosure templates that need to be made public. On June 13, 2023, the European Commission (EC) released the final Environmental Delegated Act (C(2023) 3851), which incorporates revisions to the Disclosures Delegated Act (EU 2021/2178) and includes mandatory reporting templates in the corresponding Annexes.
Both non-financial and financial undertakings are required to provide qualitative and quantitative data using these templates on an annual basis. For instance, credit institutions, following Annex V, VI, and XI of the Delegated Act, must consider qualitative aspects related to contextual information, such as the scope of assets and activities covered, data sources, limitations, as well as quantitative aspects for calculating the Green Asset Ratio (GAR) and other Key Performance Indicators (KPIs) concerning off-balance-sheet risk positions and Fee and Commission Income from Services other than Lending and Asset Management and Trading Portfolio.
It is important to note that the June 2023 Sustainable Finance package by the European Commission (EC) introduces a requirement to duplicate certain templates for CAPEX (Capital Expenses) and Turnover metrics. Furthermore, with the addition of four environmental objectives similar to CCA (Climate Change Adaptation) and CCM (Climate Change Mitigation), the number of columns in some templates increases to approximately 60, while two other templates have about 30 columns.
Due to the inclusion of these four additional environmental objectives, the need for comparative figures, and the duplications, it is anticipated that Taxonomy disclosures in the future could extend to around 100 to 150 pages in the Annual Report.