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EU sustainability goals
Successful implementation of EU taxonomy and sustainable management
The EU taxonomy is an instrument that was developed to establish uniform standards for sustainable investments in the European Union. It defines evaluation criteria that both investors and companies themselves can use to assess whether an economic activity is considered environmentally sustainable. The aim of the taxonomy is to promote the transition to a climate-neutral, resource-efficient and environmentally friendly economy, including in particular climate protection and efficient adaptation to climate change. To this end, investments are to be steered and transparency created. The EU taxonomy serves as a guide for investments that support the transition and contribute to achieving the European Union’s long-term environmental goals.
Long-term sustainability goals of the EU
Climate neutrality by the year 2050
Promotion of renewable energies
Promoting the circular economy
Reduction of greenhouse gas levels by 55 % by 2030
Companies must act now to adapt to the requirements of the EU taxonomy . Adapting early not only offers the opportunity to minimize potential risks and benefit from preferential financing terms, but also positions companies as leaders in sustainability. With increasing awareness and stakeholder demands for greater environmental responsibility, addressing the EU taxonomy is not only a matter of compliance, but also a strategic step to succeed in an increasingly environmentally conscious economy. valantic’s experienced team supports your company in developing a basic understanding of the requirements of the EU taxonomy and implementing them properly. We structure your business strategy according to the EU taxonomy and optimize your business processes. In this way, your company achieves added value in the development of internal processes in addition to the positive effects on the environment and profitability.
Green economy
The four pillars of the EU taxonomy
The EU taxonomy plays a key role on the road to a greener economy in Europe. It is based on four pillars, which can be defined as follows:
Clear definitions of sustainability topics
The taxonomy sets out binding requirements and standards that are aimed at companies, banks and the capital market. The economic activities of the parties concerned can be measured and assessed on the basis of these uniform definitions of sustainable business practices.
Laws and regulations
The EU taxonomy promotes the creation and implementation of laws and regulations that support sustainable practices. This includes, for example, laws to promote renewable energies such as the Renewable Energy Sources Act (EEG) or emissions trading systems such as the European Emissions Trading System (EU ETS), which encourage companies to reduce their greenhouse gas emissions and invest more in more environmentally friendly technologies.
Transparency
Companies are obliged to present their sustainability efforts and performance transparently. This means that operating and capital expenditure (OPEX and CAPEX) and their alignment with the guidelines of the EU taxonomy must be clearly communicated. Furthermore, the taxonomy aims to ensure that income, such as EBIT, is also taken into account and discussed in accordance with the taxonomy ratios.
Financing
In the financial sector, the taxonomy serves as a guide for financial institutions to ensure that investments comply with sustainability criteria. To this end, they must clearly disclose the extent to which they finance which companies. Financial institutions can also use taxonomy scores for companies to make their portfolio more environmentally sustainable and thus give preference to lending to organizations that can demonstrate high taxonomy scores. This means that companies that can demonstrate sustainable financial flows are given preference when granting loans.
Transparent accountability taxonomy guidelines
Which actors are required to report? What deadlines must be observed for implementation?
January 1, 2021
Reporting by large companies that already have to report in accordance with the NFRD
January 1, 2025
Reporting by all other major companies
January 1, 2026
Reporting by all capital market-oriented small and medium-sized enterprises with the exception of micro-enterprises
The NFRD stands for the Non-Financial Reporting Directive and applies to companies with more than 500 employees. Furthermore, the different company sizes shown in the chart are defined as follows:
- Employees < 10
- Annual turnover of no more than 2 million euros
- Employees < 50
- Annual turnover of no more than 10 million euros or balance sheet total of no more than 10 million euros
- Employees: Between 50 and 250
- Annual turnover of no more than 50 million euros or balance sheet total of no more than 43 million euros
Companies that fulfill two of the following three points:
- Employees > 250
- Balance sheet total > € 25 million
- Net sales > € 50 million
What data must be provided?
Under the EU taxonomy, reporting entities must disclose various types of data to show how their economic activities comply with the criteria for environmental sustainability.“Taxonomy-compliant” means that an economic activity fulfills certain criteria that identify it as environmentally sustainable according to the EU taxonomy or is in line with these criteria. Economic activities are only called “taxonomy-compliant” if they not only meet the criteria of the EU taxonomy, but also fulfill all the necessary requirements to be classified as a sustainable activity. The exact details may vary depending on the type of actor and economic activity, but in general they include
Description of economic activities
Companies must describe which of their activities could be considered taxonomy-eligible.
Share of sales
The share of sales generated from taxonomy-eligible activities.
Investment and operating expenses
The share of capital expenditure (CapEx) and operating expenditure (OpEx) that flows into taxonomy-compliant activities
Alignment of activities
Companies must explain how their activities contribute to the six environmental objectives of the taxonomy.
Do No Significant Harm (DNSH) principle
Companies must prove that the activities reported as sustainable do not lead to significant damage to any of the other environmental objectives.
Minimum social safeguards
Companies must confirm that they comply with certain social standards.
This information is intended to create transparency and enable investors and other stakeholders to better assess the sustainability of companies and financial products.
What are the challenges for companies?
The implementation of the EU taxonomy poses a number of challenges for companies that require both structural and operational adjustments . The main challenges include
Complexity
The detailed and extensive requirements of the taxonomy can be difficult to navigate, especially for small and medium-sized companies.
Data procurement
Companies need to collect comprehensive and accurate data on their environmental impact, which can be difficult due to external supply chains and production processes.
Costs
Adapting to the taxonomy may require considerable financial investment in the short term, including in data collection and reporting systems.
Training
Employees must be trained in the requirements of the taxonomy, which requires additional resources.
Business model adjustment
Companies may need to revise their business models and strategies to meet the taxonomy criteria.
Regulatory uncertainty
The ongoing development of the taxonomy and related regulations requires flexible adaptation of corporate strategies.
Despite these challenges, the EU taxonomy also offers opportunities to strengthen sustainability efforts and open up new business opportunities.
Sustainable transformation Impact on the economy
Effects on companies
The EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) establish standards for uniform sustainability reporting in order to ensure the comparability and reliability of non-financial indicators (CSRD) and sustainable financial flows (EU Taxonomy). Companies that meet the requirements of the CSRD will be obliged to prepare sustainability reports from 2024. As the taxonomy and the CSRD overlap thematically, the companies concerned are also obliged to complete their sustainability reporting in accordance with the EU taxonomy. In the future, 15,000 companies will be affected in Germany alone, including listed companies, organizations with more than 250 employees and financial institutions.
Effects on banks
In future, banks will also be obliged to prepare comprehensive sustainability reporting. They must disclose the amount of their exposure in the following areas:
- High-emission economic activities
- Customers involved in either the production or distribution of fossil fuels
- Assets with high climate risks
This detailed reporting makes the exposures comparable. In addition, existing risks and sustainability strategies of the individual banks can be analyzed and assessed. From the beginning of 2024, banks will have to disclose two further pieces of information. These are:
- Green Asset Ratio (GAR): This instrument quantifies and assesses the proportion of sustainable assets in a bank’s portfolio.
- Banking Book Taxonomy Alignment Ratio (BTAR): The BTAR assesses the compliance of financial reports with EU taxonomy standards. It is used to assess the structure and content of the reports in comparison to the IFRS standards.
By classifying economic activities as “green” or “non-green”, the EU Taxonomy enables future investors to better identify and evaluate sustainable investments. The demand for environmentally friendly investments and the interest of companies and issuers in sustainable financial products will steadily increase, which will result in more capital flowing into taxonomy-compliant activities. In addition, annual reporting is also to be produced to provide investors with clear information on whether the issue proceeds are being used sustainably.
In future, banks will therefore be obliged to disclose relevant key figures. Financial institutions also have an interest in increasing their ratios, as this gives them a competitive advantage. If investor demand for sustainable investments continues to rise, loans for companies with high taxonomy ratios are likely to be prioritized.
The six environmental objectives of the EU taxonomy
The EU taxonomy is based on six objectives that serve as a basis for determining sustainable economic activities. They are decisive factors for both the classification and evaluation of sustainable investments. Companies should contribute to at least one goal with their activities without causing significant harm to another (do no significant harm principle). The sustainability goals are as follows:
Climate protection
Climate change adaptation
Sustainable use of water and marine resources
Protection of biodiversity
Reduction of environmental pollution
Circular economy
With regard to these objectives, the taxonomy considers three categories on the basis of which economic activities are measured:
A contribution actively contributes to one of the sustainability goals and does not impair any of the other goals. (DNSH: do not significant harm)
An activity clearly helps other economic activities to make a significant contribution to at least one of the environmental objectives.
Transition activities are transition activities for which there are currently no more CO₂-friendly alternatives, whether for technological or economic reasons. However, they still contribute to the goal of climate protection.
The evolution of tomorrow The future of the EU taxonomy
The future of the EU taxonomy will be characterized by increasing integration in various economic and financial areas. In the future, it will be subject to constant refinements and optimizations in order to meet the changing requirements and challenges in the area of sustainability. Adjustments that may occur over time include, for example
- broader application to other sectors of the economy
- a more precise definition and measurement of sustainable activities and investments
- increased international cooperation and standardization to ensure consistent application and comparability of global sustainability standards
Are you looking for a competent contact in the field of EU taxonomy?
We are happy to help. Based on our project experience in the field of sustainability reporting and EU taxonomy, we can support you in the following areas, among others:
Portfolio screening
Impact analysis and support in the identification of taxonomy-capable and subsequently taxonomy-compliant activities
Determination of taxonomy ratios
Analysis of existing system landscapes and processes
Carrying out climate risk and vulnerability analyses
as prescribed by the EU taxonomy
Development of a target concept
Development of a target concept to determine the taxonomy KPIs and specification of requirements for future processes/reporting years
Support in the preparation of a pilot report
SMEs and DAX-listed companies across industries rely on our expertise in social and environmental sustainability projects
Do you need further information or specific advice?
We look forward to hearing from you! In an initial meeting, we will talk about your current challenges without obligation. Together we will find out how we can best support you and what a collaboration would look like.
Your contact persons
Jan Laakmann
Partner
valantic Supply Chain & Procurement Consulting
- Sustainability strategy & roadmap
- ESG reporting (CSRD)
- Social supply chains (LkSG, EUDR, CBAM)
Marco Fuhr
Managing Consultant
valantic
- Decarbonization
- Social Supply Chain
- Twin Transformation
Dr. Jens Lehnen
Principal
valantic
- Sustainability strategy & roadmap
- Circular Economy
- Green IT
- Climate resilience
Sebastian Badaghlou
Partner & Managing Director
valantic
- Digital Finance
- Financial Steering
- Corporate Perfomance Management
- Financial Consolidation