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Taxonomy

EU Taxonomy - First Delegated Act is Out!

We've waited... Now the clock is ticking to disclose your Taxonomy alignment!

Denis Noonan

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We’ve waited patiently... now the EU Taxonomy’s first Delegated Act (DA) is out! It provides all screening criteria required to measure how substantial contribution is to two out of the six core environmental objectives: Mitigation and Adaptation

This Delegated Act would cover the economic activities of roughly 40% of listed companies, in sectors which are responsible for almost 80% of direct greenhouse gas emissions in Europe. It includes sectors such as energy, forestry, manufacturing, transport and buildings.

European Commission, Press Release

Complying with new and evolving regulations is always a challenge, and while much has been known about most of the details of the DA, there are some important criteria that can only be confirmed today, now that the DA is published.

 

Important criteria now confirmed:

  • There are new activities in the DA such as “Manufacture of batteries” or "Close to market research, development and innovation" and "Research, development and innovation for direct air capture of CO2";
  • There are unexpected changes to activities previously included in the draft DA:
    • The exclusion of activities such as "Agriculture" and "Natural Gas";
    • Activities concerning bioenergy are no longer labelled as transitional;
    • Updated thresholds for "Forestry", adding the activity “Rehabilitation and restoration of forests, including reforestation and natural forest regeneration after an extreme event";
    • Criteria for building have been slightly changed to make existing buildings compliant if a) they have an EPC class A or b) the belong to the top 15% of the national or regional building stock, in PED terms;
    • "Electricity generation from gaseous and liquid fuels" has been made more stringent by excluding “electricity generation from the exclusive use of biogas and bio-liquid fuels”;
    • Construction of new buildings: The PED primary energy demand changes from at least 20 % to 10% lower than the threshold set for the nearly zero-energy building (NZEB) requirements;
    • “Manufacture of biogas or biofuels for use in transport” now also includes bio-liquids;
    • The scope of the activity “Manufacture of Hydrogen” has been broadened to incorporate “hydrogen-based synthetic fuels”;
    • New criteria for “Construction, extension and operation of waste water collection and treatment”;
    • "Manufacture of plastics in primary form through chemical recycling" is now only eligible if mechanical recycling is not an option;
    • Criteria regarding the substantial contribution of  "Manufacture of Hydrogen” have loosened to from 2.256tCO2eq/tH2 to  3tCO2eq/tH2;
    • New insurance activities included in the DA for the activity  "Non-life insurance: underwriting of climate-related perils";
    • Electricity generation from bioenergy now excludes electricity generation from blending of renewable fuels with biogas or bioliquid;
    • “Cogeneration of heat/cool and power from renewable non-fossil gaseous and liquid fuels” now excludes "Cogeneration of heat/cool and power from the exclusive use of biogas and bio-liquid fuels";
    • “Cogeneration of heat/cool and power from bioenergy” now excludes "Cogeneration from blending of renewable fuels with biogas or bioliquids".

So be sure to review these changes if they are related to activities in your company or underlying portfolio. 

The EU Commission also announced the Corporate Sustainability Reporting Directive proposal, revising the Non-Financial Reporting Directive (NFRD), bringing sustainability reporting on a par with financial reporting, and extending reporting requirements to all large companies and all listed companies, representing nearly 50,000 companies in the EU. Separate proportionate standards for non-listed SMEs can be used voluntarily.

But the implementation deadlines have not changed:  The first company reports and investor disclosures covering the reporting period 2021 are due at the start of 2022. This gives companies and investors 8 months from today to complete all the necessary analysis, collect and transform the required activity-level data and report the Taxonomy alignment of their company’s activities or portfolio’s holdings. 

Preparing your alignment in the next 8 months may seem like a daunting task, but if you follow a well-structured approach for performing the Technical Screening of your company or portfolio holdings, this should be easily achievable.  Remember, as described in a previous article, the process requires three steps:

Recommended actions:

The first piece of advice is to start with the low hanging fruit, such as ensuring compliance with the MSS immediately.  If you haven’t done this already, you can do this in parallel to getting up to speed with the Technical Screening of your company’s or portfolio’s activities. The MSS are based on the well established OECD Guidelines on Multinational Enterprises, UN Guiding Principles on Business and Human Rights, and the ILO Core Labor Conventions. Most EU companies are either already formally aligned with these standards or have sufficient policies in place to achieve compliance. So it should be relatively straightforward to complete this part. 

Another important piece of advice is to be pragmatic.  Compliance is imperative and it will take time just to understand the hundred pages of the Taxonomy Regulation, the Delegated Acts and any further guidelines by the ESAs. The whole industry is going through this learning process together and neither you nor your competitors will find this an easy task. But remember, it is not about being 100% Taxonomy aligned on day 1, it is about providing 100% disclosure of your level of Taxonomy alignment on day 1. Focus first on analysing the activities where your company or portfolio makes the biggest impact on Taxonomy environmental objectives. This will ensure that you have the highest quality detail of your alignment available for disclosure. It will give you the most information on where you need to prioritise actions for future improvement.  

For the most practical approach to achieve disclosure compliance, keep the following points in mind:

  1. Make use of what already exists: If your organisation is already using frameworks from SASB or TCFD or other established associations, leverage those to start your analysis.
  2. It's all about integration: Disclosure of Taxonomy alignment should become a component of existing corporate reporting, accounting and management control tools, not done in isolation.
  3. Data accuracy is important: Data needs to come from the source, not be estimated. Identify where there are data gaps and make it a priority to close them.
  4. Continuous Improvement: Use the Taxonomy as the foundation that enables your company to identify strengths and weakness of current Taxonomy alignment and set a plan for continuous measurement and improvement.

And there is a shortcut!  Greenomy has already codified the Taxonomy into a digital process that will lead you directly through the steps of calculating and certifying the Taxonomy alignment of your activities, without having to become an expert on the details of the Taxonomy and DA documentation. And by the time you read this, we should be pretty close to completing the update of all activity related changes for the DA that was released this morning! 

So if there is any further advice or guidance we can provide to assist you in producing your first round of Taxonomy reporting for 2021, contact us directly!

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