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Assessing your EU Taxonomy Eligibility: A Practical Guide for Non-Financial Corporations
The EU Taxonomy is a classification system that defines which economic activities or investments are considered sustainable and provides a common language for non-financial and financial stakeholders to measure and compute their sustainability progress. Adopted in June 2020, the EU Taxonomy aims to fast-track the transition to a sustainable economy and meet the goals set out in the European Green Deal.
More concretely, the EU Taxonomy outlines whether an economic activity is Taxonomy eligible and enables companies to understand, define and report on their EU Taxonomy eligibility. Companies under the Non-Financial Reporting Directive (NFRD) scope have had to report on their eligibility since the start of 2022. Those that will be covered by the new Corporate Sustainability Reporting Directive (CSRD), which will replace the NFRD, will have to report starting in 2025.
Getting started can be tricky and overwhelming. Here is Greenomy’s practical guide and best practices to help you get there.
What are EU Taxonomy-eligible activities?
The Statistical Classification of Economic Activities in the European Community, or “NACE codes”, form the basis of eligible activities under the EU Taxonomy. The NACE codes are the standard European nomenclature of economic activities and are similar in purpose to, for example, the North American Industry Classification System (NAICS), the International Standard of Industrial Classification (ISIC) or the UK Standard Industrial Classification of economic activities (UK SIC). The NACE codes cover 21 categories or sections that can be broken down and associated with a particular statistical unit.
The EU Taxonomy currently focuses on high-carbon emitting and transition-enabling sectors. As of 2022, these include 13 categories:
The EU Taxonomy outlines six environmental objectives that determine the eligibility of the various NACE codes. Activities are considered eligible if they can significantly contribute to one of the six environmental objectives:
How can companies assess their EU Taxonomy eligibility?
Step 1: Identifying your activities
To implement the EU Taxonomy, companies will first need to identify their Taxonomy-eligible economic activities. This can be challenging the first time around depending on the circumstances of the company. The most straightforward situation is one where a company is already making use of the NACE codes and has an understanding of the NACE category and code that relates to its business activities.
If this is not the case, companies will need to map out which classification system, if any, it is using and match or cross-reference its business activities with the list of eligible activities covered by the EU Taxonomy. Identifying the right activities is vital to ascertaining the relevant technical screening criteria for each activity (a crucial step in determining the EU Taxonomy alignment of the activities).
Let’s take a look at the last example: Company A will first start off by mapping out its activities and matching it with a corresponding NACE code if not done already. If Company A is purchasing an office space, for example, the activity will correspond to NACE code L68.1.0, which is the buying and selling of own real estate. Diving into the EU Taxonomy as a next step, Company A will see that this particular NACE code and activity is consistent with the acquisition and ownership of buildings as per the legislation. Once Company A has completed this step, it can now proceed with going through the technical screening criteria, which is needed to determine the alignment of this activity with the EU Taxonomy.
What to keep in mind:
- Determining and assessing the eligibility of companies’ economic activity is a crucial step, but not one that is sufficient or guarantees that this activity is aligned with the EU Taxonomy.
- Some activity names in the EU Taxonomy can be broad, so it is important to check the description of the activities.
- NACE codes can be linked to more than one Taxonomy-eligible activity and vice versa. When this is the case, the company should choose which Taxonomy-eligible activity their business activity is most relevant to.
- Appointing specific managers to coordinate and lead the data-gathering process can help to streamline and expedite this step.
Step 2: Aligning your financials with eligible activities
Once the company has identified which of its business activities are EU Taxonomy eligible, it will need to determine how much of its turnover, capital expenses, and operating expenses are associated with each of these activities. These financial metrics are what will allow the company to calculate its total EU Taxonomy eligibility in each of these categories.
Step 3: Calculating your EU Taxonomy eligibility
Now that the company has identified which of its activities are EU Taxonomy eligible and determined the corresponding turnover, CapEx, and OpEx associated with these activities, it can calculate its total EU Taxonomy eligibility.
A company’s eligibility will need to be calculated separately for each of these metrics, and can be done via these simple formulas:
Note: The financials of a single activity should never be double counted when summing up the numerator of these calculations. For example, if an activity is eligible for contribution to more than one environmental objective, its turnover/CapEx/OpEx should still only be included once in these KPIs.
How can Greenomy help?
Assessing your eligibility and implementing the EU Taxonomy can be challenging, time-consuming and costly. Greenomy helps companies to determine both their eligibility and alignment scores by digitizing and automating the data capturing, screening, assessment and reporting process.
Greenomy helps companies, credit institutions and asset managers to comply with the new EU Sustainable Finance Regulations (EU Taxonomy, SFDR, NFRD/CSRD) and redirect finance flows towards sustainable activities in line with the EU Green Deal. Our innovative SaaS solution establishes an all-encompassing sustainability data and analytics ecosystem that connects all critical stakeholders, so that companies, banks and investors have access to a market infrastructure and a one-stop-shop solution for their operations.
If you would like to discuss how to tackle your own reporting requirements, you can book a demo here.