EU Taxonomy roundtable – find out what we learned has been saved
EU Taxonomy roundtable – find out what we learned
We recently held a roundtable on the EU Taxonomy, which 16 of the largest ER&I companies in the Netherlands attended– this is what we learned.
There are sizeable challenges in reporting for the first time
Where should accountability sit within an organisation?
For most attendees, Taxonomy reporting is largely led by finance teams, sometimes in collaboration with sustainability teams. As Taxonomy reporting requires detailed, technical knowledge of products and services, internal project/product owners also need to be involved. Strategy and legal departments are currently less involved than might be expected given the strategic decision-making focus associated with the EU Taxonomy. As ESG reporting becomes a mandatory part of the annual report, it should be made clear who is in the lead and what departments will need to work together.
Who is responsible when it comes to global corporations?
A key challenge for large global companies is the mandate. A corporate headquarter outside the EU should confirm that an EU undertaking will start the EU Taxonomy reporting process, reaching out to all the corporate entities for financial and non-financial data for eligibility and alignment. To ensure a smooth Taxonomy process, the reason for the mandate should be clear to all EU and non-EU undertakings.
ESG data quality is an issue
Another challenge lies in the quality and availability of ESG data. It is one thing to find the information to substantiate alignment criteria, another to bring structure in data processes that can be used for a clear audit trail. ESG data is currently isolated and dispersed, controls and systems need to be built to adhere to ESG reporting requirements with the same level of data quality as financial data, and governance processes and systems need to be established.
There is a great deal of subjectivity in interpreting the Taxonomy
The EU Taxonomy is being phased in and currently lacks clear guidance. This makes assumptions and interpretations inherent to Taxonomy reporting. Attendees of the Roundtable emphasized the need to connect with peers, regulatory bodies, and auditors early to reach consensus on interpretations. As assurance will only be mandatory as the CSRD enters into force (FY2024, with reports published in 2025) there is a risk of (unintended) greenwashing. To reduce this risk, auditors should be engaged in the EU Taxonomy reporting process at an early stage, well before the regulatory requirement for limited assurance comes into play.
Not only is the EU Taxonomy regulatory text subject to interpretation, the required disclosures could also be open to interpretation. Another significant risk is therefore that stakeholders do not understand or use the data in the way it is intended. This becomes evident if you compare disclosures from companies within the same industry. Looking at eligibility disclosures from 2021, there are large discrepancies between, for example, companies in the chemical sector, where the revenue related eligibility percentage ranges from 11% to 85%. The same is expected for alignment. It is to be seen how stakeholders, especially those required to report their Green Asset Ratio, will use this information. Assessing what the financial effects will be of the disclosed KPIs is a challenge. Education up and down the value chain on how to interpret the EU Taxonomy disclosures is key to achieve the objectives of the EU Taxonomy: to attract investments in environmentally contributing activities.
The EU Taxonomy is a living framework and disclosures will likely change significantly in the next few years
As the regulation will be updated and more guidance made available, changes in EU Taxonomy disclosures in the future are likely, including changes in disclosed KPIs, levels of alignment and activities in scope of the Taxonomy as more innovative activities are expected to be included over time. Comparability of disclosures will therefore also be impacted within and across sectors.
It is key to stay up to date and explain every assumption made, to prevent the need for restating disclosures.
Challenges notwithstanding, the Taxonomy presents many opportunities
The Taxonomy is a forward-looking reporting exercise. Treating it as just a reporting requirement would not capture some of the opportunities it can give rise to. If done well, it supports companies to think strategically about investments in climate-mitigating technologies, learn from good practices across the business, identify cost reduction opportunities and even consider new business models. It is therefore key to align the business strategy, long-term investments, and procurement criteria with the EU Taxonomy requirements where possible, to maximise the opportunities it presents.
From understanding the requirements, to data collection, to involving the right internal stakeholders, educating external stakeholders (auditors, investors, customers), and treating the EU Taxonomy as a strategic exercise, the EU Taxonomy (and by extension, the Corporate Sustainability Reporting Directive) is a large yet exciting undertaking for companies, regardless of their size and structure. It is key to start the learning journey early, share knowledge and collaborate on EU Taxonomy challenges and opportunities.
Please do get in touch if you're struggling with where and how to begin.