Navigating the Green Finance Landscape – the importance of EU Taxonomy reporting for sustainable investing
Have you explored the intricacies of EU Taxonomy reporting this year? If not, now is the time to gear up for the forthcoming changes in EU Taxonomy reporting set to take effect this year – especially with the Corporate Sustainability Reporting Directive (CSRD) now in force. From mandatory reporting for an additional category of companies to the introduction of precise technical screening criteria, these innovations will elevate the accuracy, consistency, and comparability of sustainability reporting. The expanded scope, covering a diverse range of environmental objectives, signals a new era of comprehensive assessment and disclosure. Transparency has become more crucial as companies are required to disclose their alignment with the taxonomy's criteria, inviting closer scrutiny and fostering a collective commitment to sustainability. The silver lining is that compliance with the criteria unlocks opportunities in green finance, paving the way for increased investment in sustainable initiatives and companies. The good news is that you don’t have to navigate EU Taxonomy reporting alone; TüV SüD’s experts are here to support you.
What is the EU Taxonomy regulation and why is it important?
As the call for a more sustainable future grows louder, the European Union has taken significant steps to address environmental concerns and promote sustainable investment practices. A key initiative driving these efforts is the EU Taxonomy Regulation, a regulatory framework derived from the EU’s action plan for sustainable finance. This framework increasingly compels companies to report on their sustainability performance, responding to the growing demand from customers for information on the sustainability of the products they purchase.
To promote sustainable investment, the EU mandates all financial market participants and large public interest companies to report their performance under the Sustainability Finance Disclosure Regulation (SFDR) and the Non-Financial Reporting Directive (NFRD). Additionally, their activities must comply with the requirements of the EU taxonomy regulation to be classified as sustainable activities.
SFDR applies to financial companies like financial advisors, banks, insurance companies, aiming to make the sustainability impact of funds comparable and accessible for investors. It mandates the disclosure of the extent to which sustainability influences decision-making for products, and the actual sustainable impact for those products.?NFRD, on the other hand, is a legal framework requiring large companies of public interest to report on the Environmental, Social and Governance (ESG) aspects of their operations.
The EU taxonomy significantly impacts businesses and investors by creating a common language for sustainable finance. It classifies economic activities based on sustainability criteria, helping companies identify environmentally sustainable investments contributing significantly to at least one environmental objective without causing harm to others. The environmental objectives in the EU Taxonomy regulation include:
1.??????? Climate change mitigation
2.??????? Climate change adaption
3.??????? The sustainable use and protection of water and marine resources
4.??????? The transition of circular economy
5.??????? Pollution prevention and control
6.??????? The protection and restoration of biodiversity and ecosystems
Companies must use these criteria to demonstrate how 'green' they operate and invest, while also complying with minimum social safeguards.
What’s new in 2024?
As of January 2024, the Corporate Sustainability Reporting Directive (CSRD) replaces the Non-Financial Reporting Directive elevating non-financial reporting to equal importance with financial reporting. This mandatory sustainability reporting aims to provide better information for investors, customers and stakeholders, encouraging more capital flow into sustainable business models. The CSRD affects around 50,000 EU companies, including at least 15,000 in Germany, whereas the NFRD only covered 11,000 companies across the EU.
Which companies are impacted?
- 250 employees
- EUR 50 million in revenues
- EUR 25 million balance sheet total
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- 10 employees
- 900 k EUR in revenues
- 450 k EUR balance sheet total
When does CSRD apply?
CSRD broadens the scope and content of reporting obligation, requiring companies to disclose comprehensive sustainability information, following standardised standards. A key innovation is the concept of double materiality, where companies must report on a sustainability issue if it has a significant financial impact or relates to significant impacts on people or the environment. The CSRD Directive also tightens audit requirements for sustainability reporting, mandating detailed external audits by third parties. The assurance will initially be limited but will increase to a stricter level over time.
Challenges and opportunities for companies
Reporting on social and environmental performance, while meeting the requirements of the regulatory framework, poses both challenges and opportunities for companies. The primary challenge lies in the comprehensive data collection and analysis to assess the environmental sustainability of their activities, demanding resource-intensive efforts, such as internal data management, stakeholder engagement, and specialised expertise. Aligning existing reporting practices and systems with the taxonomy's criteria presents another challenge, ensuring compliance with the new requirements. Additionally, companies may encounter difficulties in interpreting and understanding the nuances of the technical screening criteria for each environmental objective.
Despite these challenges, there are significant opportunities. Reporting according to the EU taxonomy requirements provides companies with a framework and standardised language to demonstrate their commitment to sustainability, enhancing transparency and enabling them to showcase their commitment to environmentally sustainable practices. By aligning with the EU taxonomy, companies can attract green finance and investment opportunities, accessing capital specifically dedicated to supporting sustainable initiatives. Furthermore, implementing EU Taxonomy reporting allows companies to gain insights into their environmental performance, uncover inefficiencies, and identify areas for improvement, aiding in their transitional journey toward sustainability and cost optimisation. Successful implementation of EU Taxonomy reporting can enhance a company's long-term resilience and contribute to the broader goal of creating a greener, more sustainable economy.
The crucial role of a professional partner
The importance of having a professional partner is crucial in navigating these challenges. The complexities of EU Taxonomy reporting, coupled with evolving regulatory requirements, can be overwhelming to navigate alone. At TüV SüD , we help by providing highly recommended third-party verification on the fulfillment of eligibility and technical screening criteria, along with a clear project structure and a timeline. Throughout the EU Taxonomy verification project, we offer various modular verification services such as:
Upon completion, you will receive a detailed report, serving as a reliable reference for fulfilling disclosure obligations to capital providers or auditing institutions such as financial auditors.
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Why choose TU?V SU?D for EU taxonomy reporting support?
Your success is our primary goal, and our expertise is the key to unlocking it. TU?V SU?D brings decades of technical verification services experience across a wide range of industry sectors. Furthermore, we are accredited for validating environmental information and possess several decades of expertise in Greenhouse Gases (GHG) Emissions reporting verification and GHG reduction projects validation, specifically addressing the initial two environmental goals with established technical screening criteria. TU?V SU?D’s global presence ensures the efficient delivery of EU Taxonomy services at your locations worldwide.
If you want to learn more about how we can assist you, please visit our website at EU taxonomy reporting .
Wishing you a successful 2024 reporting year.