What is it and how to prepare one?

Introduction

The Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464, CSRD) requires in-scope companies to publish a sustainability report in line with the European Sustainability Reporting Standards (ESRS). However, it is not the only report that companies will be obliged to publish. With the changes brought about by the CSRD, companies will also have to prepare an EU Taxonomy Report in line with Directive (EU) 2020/852 (EU Taxonomy Regulation). The respective disclosures include companies’ sustainable economic activities, meeting the “Do No Significant Harm” (DNSH) criteria, and complying with the minimum safeguards and technical screening.

In this newsletter we will look at what the EU Taxonomy is, how it relates to the CSRD, what companies are required to disclose under the EU Taxonomy Regulation and how to prepare an EU Taxonomy Report.

Background

The European Union has set certain sustainability goals to be achieved through the European Green Deal, one of which is a sustainable economy. A key element of the European Green Deal is the EU Taxonomy. It is a classification system used to define environmentally sustainable activities according to regulatory requirements. The EU Taxonomy Regulation has been adopted as part of the EU Taxonomy, specifying the non-financial disclosures.

The EU Taxonomy is also linked to other EU policies related to non-financial disclosures, such as the CSRD. Both the CSRD and the EU Taxonomy Regulation have the same objectives: to encourage companies to adopt sustainable business practices and to protect stakeholders, especially investors, from “greenwashing”. Companies falling within the scope of the CSRD are required to disclose the alignment of their business activities according to Article 2 of the EU Taxonomy Regulation.

The EU Taxonomy Regulation

The EU Taxonomy Regulation applies to companies required to publish a non-financial statement under Articles 19a and 29a of the Accounting Directive (Directive (EU) 2013/34, AD) (Article 2 EU Taxonomy Regulation). With the recent amendments by the CSRD, the following entities are required to prepare an EU Taxonomy Report:

  • Large entities which are public-interest entities and public-interest entities which are parent undertakings of a large group (in 2025, for the reporting period 2024),
  • Large undertakings and parent undertaking of a large group (in 2026, for the reporting period 2025),
  • Small and medium-sized undertakings (SMEs) which are public-interest entities (in 2027, for the reporting period 2026)

Reporting in line with the EU Taxonomy is not mandatory for non-listed SMEs or non-EU third country companies. However, these companies may voluntarily report using the EU Taxonomy for transparency or to attract sustainable investment.

Article 3 of the EU Taxonomy Regulation sets out the criteria for an economic activity to be considered environmentally sustainable. These are:

  1. Contributing substantially to the environmental objectives,
  2. DNSH,
  3. Compliance with minimum safeguards, and
  4. Compliance with technical screening.

With regard to the first criterion, Article 8 et seq. of the EU Taxonomy Regulation provides the following list of activities that are considered economic activities which are substantially contributing to environmental objectives:

  • Climate change mitigation and adaptation,
  • Sustainable use and protection of water and marine resources,
  • Transition to a circular economy,
  • Pollution prevention and control, and
  • Protection and restoration of biodiversity and ecosystems.

For the second criterion, Article 17’s “Do No Significant Harm” principle ensures that the economic activity does not impede the achievement of the other environmental objectives. For example, a company’s significant contribution to climate change mitigation should not result in significant greenhouse gas emissions.

Article 18 sets out minimum safeguards for the third criterion. As minimum safeguards, companies must ensure compliance with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights and the International Bill of Human Rights, etc.

Finally, Article 19 provides the technical screening criterion. This criterion requires companies to identify the most relevant contributions to environmental objectives and to specify the minimum requirements to be met in order to avoid significant harm to other environmental objectives (substantial contribution and DNSH criteria).

Once identified according to these criteria, the proportion of economic activities that are considered environmentally sustainable must also be disclosed. The Disclosures Delegated Act (Commission Delegated Regulation (EU) 2021/2178) provides guidance to companies on how to make this calculation. Under Annex II, the Act defines key performance indicators (KPIs) relating to:

  • the company’s turnover,
  • capital expenditure (CapEx),
  • operational expenditure (OpEx), and

provides spreadsheets for companies to make a proper calculation.

The EU Taxonomy Report

To simply put, companies must disclose the following in their EU Taxonomy Report:

  • Their activities that qualify as sustainable economic activity,
  • Their compliance with the DNSH criteria,
  • Their compliance with the minimum safeguards,
  • Their compliance with the technical screening, and
  • Calculations made in accordance with the Disclosures Delegated Act.

For companies preparing a report for the first time, the question of how to prepare an EU Taxonomy Report arises. To assist companies with such questions, the European Commission (EC) has published a User Guide for companies (https://ec.europa.eu/sustainable-finance-taxonomy/assets/documents/Taxonomy%20User%20Guide.pdf).

In the User Guide, the EC recommends a four-step approach for preparing an EU Taxonomy Report:

  1. Identify the activities that are covered by the EU Taxonomy Regulation and other regulations published for EU Taxonomy (taxonomy-eligible activity),
  2. Assess whether the company’s activities meet the criteria of substantial contribution to environmental objectives and DNSH (taxonomy-aligned activity),
  3. Check compliance with minimum safeguards, and
  4. Apply the relevant reporting requirements in your company.

In order to identify and assess which of the company’s activities are covered by the EU Taxonomy Regulation and other regulations under the EU Taxonomy, companies can refer to the EU Taxonomy Compass (https://ec.europa.eu/sustainable-finance-taxonomy/taxonomy-compass/the-compass). This tool guides companies in different sectors with different activities and their disclosure requirements.

For the calculations required under the Disclosures Delegated Act, the EC has also provided the EU Taxonomy Calculator (https://ec.europa.eu/sustainable-finance-taxonomy/wizard). This tool focuses on the calculations of the turnover, CapEx and OpEx KPIs and aims to assist companies in the implementation of the reporting requirements.

As identifying and calculating such disclosures can be challenging, we advise companies to use the EC’s tools and prepare a dummy (test) EU Taxonomy Report in advance to be ready when their reporting period arrives.

The CSRD

The CSRD refers to the EU Taxonomy Regulation in Article 29d, where the single electronic reporting format is mentioned. The CSRD requires companies to include the EU Taxonomy Report when reporting in XBRL format for ESRS. Companies may add their EU Taxonomy Report in ESRS report as a separate section to easily tag their disclosures in the XBRL system.

It is also worth noting that the rules on assurance requirements for sustainability reports under the CSRD will also apply to the same extent to the EU Taxonomy Report.

Conclusion

Companies subject to the CSRD are required to prepare an EU Taxonomy Report in accordance with the EU Taxonomy Regulation and the Disclosures Delegated Act. In the report, companies must disclose their economic activities that substantially contribute to the environmental criteria, the “Do No Significant Harm” criteria, the minimum safeguards and technical screening set out in the EU Taxonomy Regulation, as well as their KPI calculations on turnover, CapEx and OpEx in line with the Disclosures Delegated Act.

Companies can adopt the proposed steps and use the tools developed by the EC to prepare an EU Taxonomy Report. Once prepared, the EU Taxonomy Report will need to be electronically tagged and will be subject to assurance requirements as required by the CSRD.