The European Union’s commitment to sustainable finance is becoming a critical aspect of business operations across the globe. One of the core components of this movement is the EU Taxonomy—a comprehensive framework aimed at guiding businesses and investors toward sustainable activities. Compliance with the EU Taxonomy is not just about regulatory adherence; it offers an opportunity to align with global sustainability goals and demonstrate leadership in environmental responsibility. This blog provides a detailed guide on how to prepare for EU Taxonomy compliance, the key steps involved, and the strategic benefits that compliance offers.
Understanding the EU Taxonomy
The EU Taxonomy is a classification system established under the European Green Deal and further integrated into the EU’s Sustainable Finance Strategy. It aims to define what economic activities can be considered environmentally sustainable, thereby helping investors and businesses make informed decisions.
The Purpose of the EU Taxonomy
At its core, the EU Taxonomy seeks to create a unified language around sustainability. By establishing clear guidelines, the Taxonomy helps prevent greenwashing, where companies falsely present their activities as environmentally friendly. It does so by setting measurable criteria for what constitutes a “sustainable” activity, based on six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
The EU Taxonomy is designed to address these objectives by requiring businesses to demonstrate that their activities make a substantial contribution to at least one of these goals, while doing no significant harm to the others.
The Key Steps to Compliance
1. Identifying Relevant Activities
The first step is to evaluate which of your business activities fall under the scope of the Taxonomy. The EU Taxonomy Regulation primarily focuses on sectors with significant environmental impacts, such as energy, manufacturing, transportation, and construction. However, its scope is broad, so it’s important to carefully assess whether your operations are covered.
Questions to Consider:
- Does your business involve sectors explicitly mentioned in the Taxonomy?
- How does your activity contribute to one or more of the six environmental objectives?
- Are your current processes aligned with sustainability goals?
Once relevant activities are identified, they need to be categorized based on whether they are Taxonomy-aligned.
2. Applying the Technical Screening Criteria
Each economic activity covered by the EU Taxonomy is subject to strict technical screening criteria. These criteria serve as the benchmark for determining whether an activity can be considered environmentally sustainable. They are detailed and sector-specific, and they define what it means for an activity to contribute to the six environmental objectives mentioned above.
Sector-Specific Considerations:
- Energy Sector: Evaluate how your energy production or distribution meets specific criteria for carbon emissions reduction.
- Construction Industry: Ensure buildings meet energy efficiency requirements.
This step can be complex, requiring expertise in both the regulatory framework and the specific sector your business operates in. Many companies opt to work with sustainability consultants or legal experts to ensure that their activities meet these criteria.
3. Demonstrating “Do No Significant Harm” (DNSH)
In addition to contributing to one of the six environmental objectives, your business activities must also meet the “Do No Significant Harm” (DNSH) requirement. This means that while your activity may contribute to, for example, climate change mitigation, it should not cause harm to other environmental objectives like biodiversity or pollution prevention.
Example:
A company that contributes to climate change mitigation by building renewable energy infrastructure must ensure that the construction process does not negatively impact local ecosystems or biodiversity.
4. Aligning with Disclosure Obligations
The EU Taxonomy includes specific reporting obligations for businesses, particularly those already covered under the Non-Financial Reporting Directive (NFRD). These companies are required to disclose the percentage of their revenue, capital expenditure (CapEx), and operational expenditure (OpEx) that is associated with Taxonomy-aligned activities.
Even if your company does not fall under the NFRD, aligning your business with the EU Taxonomy can still provide significant benefits. Voluntary disclosure of Taxonomy compliance can improve your company’s reputation, increase investor confidence, and demonstrate your commitment to sustainability.
Implementation Considerations:
- Coordinate across departments (finance, operations, and sustainability teams) for effective reporting.
Strategic Benefits of EU Taxonomy Compliance
1. Enhanced ESG Profile
Environmental, Social, and Governance (ESG) factors are becoming increasingly important to investors, consumers, and stakeholders. EU Taxonomy compliance strengthens your ESG profile by providing a verifiable framework for sustainability. Investors are more likely to favour companies with strong ESG credentials, especially in sectors where sustainable practices are a priority.
2. Access to Sustainable Finance
As the EU continues to push for sustainable finance, many financial institutions are offering better terms for companies that meet sustainability criteria. Businesses that comply with the EU Taxonomy are more likely to gain access to green bonds, loans, and other forms of sustainable finance, reducing their cost of capital.
3. Competitive Advantage
Sustainability is no longer a fringe concern but a central pillar of business strategy. Companies that prepare early for EU Taxonomy compliance can position themselves as leaders in sustainability, gaining a competitive edge over competitors who may lag behind in regulatory or market expectations.
4. Long-Term Business Resilience
By aligning with the EU Taxonomy, companies are better prepared to weather future regulatory changes and shifts in market demand toward more sustainable products and services. This forward-looking approach fosters long-term resilience and helps future-proof your business in a rapidly changing global economy.
Practical Considerations for Implementation
1. Conduct a Gap Analysis
Begin by conducting a gap analysis to assess how far your current activities are from meeting the EU Taxonomy requirements. This can help you prioritise areas that need attention and plan the resources needed for compliance.
2. Build Internal Expertise
EU Taxonomy compliance requires expertise in both regulatory requirements and specific sector-related technicalities. Invest in training your internal teams or hire external consultants who can guide the compliance process.
3. Integrate Sustainability into Core Strategy
Ensure that your efforts to comply with the EU Taxonomy are not treated as a standalone project but are integrated into your company’s core business strategy. This holistic approach ensures long-term sustainability and a consistent alignment with broader environmental goals.
Contact Us Today
Exploring EU Taxonomy compliance presents a unique opportunity for your business to lead in sustainability and strengthen your strategic position. By aligning with the Taxonomy’s requirements, you can unlock new financial markets, enhance your ESG profile, and build long-term resilience.
For assistance in achieving EU Taxonomy compliance or to explore its benefits for your business, please reach out to us. At NCMB, we are your trusted financial partner, adept at navigating today’s complex regulatory environment. We offer a comprehensive range of financial services to empower businesses in Malta, helping you achieve your goals with confidence and agility.
