The EU Taxonomy as a Business Imperative

With a mandatory deadline having just passed in January 2022, the new year has marked an important cornerstone in the process of aligning with the EU Taxonomy. Due dates now draw near for disclosure of the environmental objectives: climate change mitigation and adaptation. Also, the technical criteria for the remaining four objectives are expected to be released soon.

While many would expect compliance to be one of the key reasons to align with the EU Taxonomy, we have found that there are other strategic reasons why it is imperative to assess your business against the EU Taxonomy.

Some companies are not required to disclose on their alignment but wish to do so voluntarily for various other reasons. Meanwhile, others need to see the business case before putting in the extensive effort that assessing one’s degree of alignment with the EU Taxonomy requires. This raises a central question – what makes aligning with the EU Taxonomy a business imperative?

Based on our experience and dialogue with companies subject to disclose on the EU Taxonomy, we have identified six important reasons as to why aligning with the EU Taxonomy is imperative to the success of a business.

Compliance is one of the most straightforward and demanding reasons to align with the EU Taxonomy – it is set in law. For companies falling under the scope of the Non-Financial Reporting Directive (NFRD) or Sustainable Finance Disclosure Regulation (SFDR), compliance is required already next year. Those that are not included in this scope will likely be required to disclose their alignment starting 2024 under the review of the NFRD: The Corporate Sustainability Reporting Directive (CSRD).

The timeline below shows when reporting on taxonomy eligibility and reporting on alignment will be due for each of the three groups affected by the EU Taxonomy. Some companies will possibly fall under multiple groups, such as credit institutions that could be affected by both the NFRD, as a financial undertaking, and by the SFDR when offering investment products.

Shifting timelines, national implementation of EU directives by member states and ambiguity of disclosure requirements leaves for a lack of clarity among companies as to whether or not they need to comply with the EU Taxonomy already this coming year. In such circumstances, we recommend to rather be safe than sorry and commence screening economic activities’ alignment already.

By doing so, companies will be prepared either way, and have all processes, systems and people in place when disclosure requirements are due under the CSRD.

Financial institutions will have to report on their Taxonomy alignment and will need input from the entities they invest in to do so. In other words, for financial institutions to calculate their Taxonomy alignment, they will need the Taxonomy alignment numbers from their investees.

Indeed, several of our clients mention that their financial partners have been asking and pressuring them to share their Taxonomy alignment already although currently obliged to disclose eligibility.

Furthermore, disclosing your Taxonomy alignment will also increase access to finance. The Taxonomy-alignment of non-financial companies will likely guide the investment decisions of financial institutions, as they would like to have a high alignment percentage themselves. Many will likely be more interested to invest in projects and companies that have a high Taxonomy alignment.

Therefore, when seeking external financing for a project or company, disclosing on EU Taxonomy alignment will likely increasingly attract investors.

For the same reasons, potentially interested investors might require disclosure of the Taxonomy alignment from the company or project before investing in it. Having your Taxonomy alignment share and disclosure ready will ease the dialogue with potential financial partners.

As the Taxonomy becomes the mainstream vocabulary in defining sustainability, the expectation from public authorities, relevant licencing agencies and pressure groups to illustrate, not just alignment, but strong percentages will become more pronounced. In the same way that corporate sustainability has become a license to operate – aligning with the EU Taxonomy shows a proactive and positive approach to sustainability efforts that are substantiated in a “common language”.

It demonstrates a commitment to long-term and sustainable value creation. The pressure to develop ahead of national or EU legislation will increase, as a reasonable Taxonomy percentage will become a licence to operate both in real terms, such as concession agreements, but also intuitively, such as public opinion.

This business imperative reminds companies to consider their supply chain and the implications it will have on the requirement to align with the Taxonomy. Buyers’ purchasing services are likely to “impose” Taxonomy alignment on their suppliers, as their purchasing of goods or services is likely to become part of their own alignment.

Both alignment and a strong percentage will make a company the provider or supplier of choice for many customers or the reverse if alignment is low. Stakeholders across the value chain will expect and require disclosure and probably also certain levels of alignment percentages. Either way, alignment is most likely to become a requirement in procurement.

Aligning with the Taxonomy and being ambitious in doing so, will place a company ahead of the legislative curve, as well as that of permits, licences etc. The strong, continuous alignment will ensure a strong position going forward from multiple angles, such as compliance, efficiencies, brand, customers etc.

The Platform on Sustainable Finance recognises that it is highly important that the EU Taxonomy strongly aligns with, and is based on, other EU directives and regulations. This includes not only current applicable regulations and directives but also those under development.

The EU Taxonomy is also heavily science-based and in line with the sustainability, targets set to conform to the Paris Agreement, indicating that it will prepare for the EU Legislation yet to come, specifically under the Green Deal.

Besides EU legislation, the Taxonomy is also heavily based on best-practice frameworks, methodology and standards both general and sector-specific and both national and global. As it was developed with strong input and involvement from sector-specific stakeholders, aligning with the EU Taxonomy provides for alignment with sector-specific best practices.

The Taxonomy drives efficiencies within many areas such as energy and water, as well as materials. The strong alignment will drive overall efficiencies but also, as the Taxonomy often refers to, best-practice and best-available techniques for the different eligible economic activities. Improving efficiency and innovation often results in quantifiable financial savings.

Being aligned may also speed up planning applications for site developments, as well as permitting procedures. Shortening the timeframe required to actually get a plant located, planned, constructed and operational directly contributes to enhanced revenue and mitigates against costs incurred from delays.

In the above, we have outlined key reasons as to why the EU Taxonomy is a business imperative, beyond being legally required to report on the Taxonomy. Companies are likely to be affected by the EU Taxonomy indirectly through the value chain and working actively with the Taxonomy makes sense from a strategic perspective.

Essentially, understanding the reasons and assessing the importance and relevance of each of them uncovers what we call the Taxonomy opportunity. Whether you must comply or not – the Taxonomy is likely to affect a company’s competitive position in the very near future.