Insights from EU Taxonomy Expert: Key Challenges, Common Mistakes & Tips to Get Started

In recent years, the concept of sustainable finance has become increasingly prominent, with the EU Taxonomy at the forefront of this movement. However, the implementation of the EU Taxonomy has come with its set of challenges for companies. To shed some light on this topic, we sat down with sustainability expert at Greenomy, Quentin Hennaux, to discuss the main obstacles companies face when implementing the European regulation. Throughout the interview, Quentin shared his insights and practical recommendations for companies looking to navigate the complexities of EU Taxonomy reporting, avoid common mistakes, and embrace innovative sustainability initiatives.

• What Are the Key Challenges that Companies Face when Implementing the EU Taxonomy?
• What is the Most Common Mistake of Companies in EU Taxonomy Reporting?
• What Role do you Think the EU Taxonomy will Play in Promoting Sustainable Finance?
• What Advice Would you Give to Companies that are Just Beginning their EU Taxonomy Reporting?
• What is an Example of an Innovative Sustainability Initiative Undertaken by Businesses?
• Simplifying EU Taxonomy Reporting with Greenomy
  

What Are the Key Challenges that Companies Face when Implementing the EU Taxonomy?

Throughout his discussions with various companies, Quentin Hennaux uncovered that common challenges consistently arise for companies during their reporting exercises. Here are the key challenges that companies frequently encounter in their reporting endeavors:

Defining Eligible Activities

The first challenge encountered in EU Taxonomy reporting lies in defining the activities that will be encompassed within the framework of the EU Taxonomy. Quentin Hennaux illustrates:

It is important to understand that even installing solar panels on a company’s roof, independently of its core business, can potentially be associated with CapEx of the company and accounted as an eligible activity.

Quentin cites a notable example from the Platform on Sustainable Finance in 2022, which highlights the recurring phenomenon of similar companies interpreting their eligibility to the EU Taxonomy differently. He explains:

For instance, five car manufacturers within the same industry showcased varying interpretations of eligible activities for their core business. While one manufacturer included their supply chain activities such as the manufacture of aluminum and steel, the majority focused on the revenue-generating activity of 'Manufacture of low carbon technologies for transport'. It is worth noting that only one manufacturer included its R&D activities within the eligible activities as defined by the EU Taxonomy.

Collecting Data

Data availability poses the second significant obstacle for companies according to Quentin. He emphasizes:

The required information to report is not always available or still needs to be determined. For instance, conducting climate risk assessments often demands comprehensive data, which may not have been carried out by certain companies. Also, the difficulty lies in the fact that, while the EU Taxonomy demands 2,500 data points compared to 1,200 for CSRD, only a limited subset pertains directly to the company itself. This complexity adds to the difficulty of data collection, presenting a significant obstacle for companies aiming to meet the reporting requirements accurately.

What is the Most Common Mistake Made by Companies in EU Taxonomy Reporting?

Expanding on Quentin Hennaux's earlier point, one of the main difficulties in EU Taxonomy reporting is accurately defining and assessing eligible activities, which often leads to repeated mistakes. He explains:

The first year of reporting on eligibility has shown that the EU Taxonomy has given room for interpretation with regard to regulatory requirements. Whether it is for the methodology but also for the interpretation of certain criteria, some companies interpret them differently. It is therefore important that companies have a suitable process to identify and assess their activities.

An inaccurate interpretation of the EU Taxonomy can have significant implications. In addition to incorrect reporting and potential non-compliance with regulatory requirements, it misrepresents a company's sustainability efforts and undermines the credibility of the entire reporting process. It is essential for companies to ensure alignment between their reported activities and the EU Taxonomy's criteria to demonstrate their genuine commitment to sustainability and avoid any misinterpretation or confusion in the reporting process.

What Role do you Think the EU Taxonomy will Play in Promoting Sustainable Finance?

The EU Taxonomy is positioned to play a crucial role in advancing sustainable finance by addressing the pressing need for a fair transition and zero greenhouse gas emissions by 2050, as outlined in the Green Deal, explains Quentin.

By establishing a framework, the EU Taxonomy enables the direct allocation of capital towards sustainable activities. Sustainability expert Quentin Hennaux continues:

Any company can say they are sustainable, but the EU Taxonomy intends to provide stakeholders appropriate definitions for which activities can be considered environmentally sustainable thanks to science-based criteria. Of course, some criteria can be easy to reach, but the EU Taxonomy is designed to be reviewed and some criteria can be made more stringent over time.

In this way, the EU Taxonomy not only ensures transparency and credibility but also guides investors and businesses in making informed decisions to support the transition to a more sustainable future.

Additionally, Hennaux underlines the pivotal role of the EU Taxonomy in facilitating access to green financing. “By establishing transparent criteria and guidelines, it empowers investors to evaluate investments that align with environmental objectives. This builds confidence and directs capital towards truly sustainable activities, promoting the transition to a greener economy.”

What Advice Would you Give to Companies that are Getting Started on their EU Taxonomy Reporting?

In response to the risk of misidentifying activities, Quentin Hennaux provides valuable advice:

An essential tip is to understand the NACE code that applies to your core business. This understanding can help automatically identify relevant activities within the EU Taxonomy framework. By aligning the core business with the corresponding NACE code, companies can streamline the process of identifying activities for reporting purposes. Coordination between the financial and sustainability departments is also key as companies need to map the financial data required to calculate the turnover, CapEx and OpEx KPIs.

Discover how to easily generate your EU Taxonomy Reporting in 3 steps.

What is an Example of an Innovative Sustainability Initiative Undertaken by Businesses?

Once EU Taxonomy reporting is completed, the following step involves improving EU Taxonomy scores through the implementation of sustainability initiatives. These initiatives are essential in driving meaningful and lasting sustainability transformations. Quentin Hennaux highlights an inspiring sustainability initiative undertaken by the company Enel Green Power:

Enel Green Power installed ‘Sustainable Solar Parks,’ a global initiative which focuses on implementing tailored agrozootechnical solutions and sustainable practices across diverse photovoltaic (PV) sites. Going beyond the mere installation of solar panels, the company made notable strides in actively promoting biodiversity. They created bee parks and implemented measures to improve soil oxygenation on their solar panel fields.

Although it was not an effort directly linked to improving its EU Taxonomy scores, this holistic approach, aligned with the 'do no harm' principle of the framework, is a good example of a company showcasing commitment to identifying and addressing its environmental impacts.

Simplifying EU Taxonomy Reporting with Greenomy

Implementing the EU Taxonomy comes with its fair share of challenges, such as defining eligible activities and ensuring data availability. However, with Greenomy's expertise and comprehensive solutions, businesses can confidently embark on their sustainability reporting journey and navigate the complexities of EU Taxonomy compliance with clarity and efficiency. Quentin Hennaux adds:

Assisting companies in defining activities to consider for EU Taxonomy reporting and streamlining the data collection process is precisely where Greenomy excels. Our comprehensive suite of services includes tailored expert advice and guidance specifically designed to help companies navigate the intricacies of the EU Taxonomy, CSRD, and other relevant disclosure regulations.

Whether you are just beginning your sustainability reporting journey or seeking to enhance your existing practices, the Greenomy Advisory Services are here to provide the necessary support and expertise to ensure a smooth and efficient process. Do not hesitate to reach out to benefit from the guidance of our team of Sustainability Experts.