EU Taxonomy Alignment: Five Steps and Best Practices for Non-Financial Corporates

The EU Taxonomy defines whether an economic activity can be classified as sustainable and enables companies to compute both the eligibility as well as the alignment of their activities and report on these in a transparent and consistent manner. Before you can get started with measuring your EU Taxonomy alignment, you will need to have assessed your eligibility. Take a moment here and check out Greenomy’s practical guide for assessing your EU eligibility, if you haven’t done so already.

Determining and assessing the eligibility of your economic activities is a key step, but not one that guarantees that your activities are aligned with the EU Taxonomy. Understanding the ins and outs of your EU Taxonomy alignment score and the steps to get you there is, therefore, crucial to both implementing and complying with the EU Taxonomy.

In this article, we will cover the following:

• What is EU Taxonomy Alignment?
• How Can you Assess your EU Taxonomy Alignment?
• Step 1: Making a Substantial Contribution
• Step 2: Doing No Significant Harm (DNSH)
• Step 3: Complying with Minimum Social Safeguards
• Step 4: Calculating your financial KPIs
• Step 5: Completing your report and making disclosures
• How Can Greenomy Help?‍

‍What is EU Taxonomy Alignment?

Once companies have determined their total turnover, CapEx and OpEx, identified their activities, matched these with the NACE codes and determined their environmental objective(s) as well as the turnover, CapEx and OpEx associated with each, they can start screening their EU Taxonomy alignment.

The integral part of this process is measuring and establishing whether the activities meet the Technical Screening Criteria (TSC) under the EU Taxonomy. The TSCs comprise both quantitative and qualitative thresholds and requirements that must be met by eligible activities in order to claim and showcase that they make a substantial contribution to an environmental objective and do no significant harm (DNSH) to the remaining ones.

To screen an economic activity, companies must adhere to the following steps to work out the activity’s alignment with the EU Taxonomy:

1. First, the activity must make a substantial contribution to an environmental objective (this is determined using specific TSC)
2. Second, it must do no significant harm to the remaining environmental objectives (this is also determined using specific TSC)
3. Third, the company as a whole must meet minimum social safeguards

An eligible activity is aligned with the EU Taxonomy only when it fulfils every substantial contribution and DNSH TSCs and if it completes the minimum social safeguards assessment.

What to keep in mind:

• A company’s EU Taxonomy alignment score indicates where it stands on the EU-defined sustainability spectrum and is directly related to its likelihood to attract sustainable finance flows.
• The EU Taxonomy also works in cooperation with the NFRD, CSRD, and SFDR. These regulations also require financial institutions to publicly disclose key performance indicators (KPIs) that represent the Taxonomy alignment of their eligible activities or financial products.
• Credit institutions rely on companies’ Taxonomy alignment scores to compute their Green Asset Ratio (GAR) and can influence their lending decisions.
• Companies covered by the NFRD (or soon, by the CSRD) with no EU Taxonomy-eligible activities, will still need to fulfil the reporting elements for non-eligible activities and make disclosures accordingly.

How Can you Assess your EU Taxonomy Alignment?

Step 1: Making a Substantial Contribution

The first step to complying with the EU Taxonomy is to make a substantial contribution to at least one of the six environmental objectives. As outlined above, an activity must meet certain TSCs in order to assert that it makes a substantial contribution to an environmental objective. These TSCs are tailored to each activity and objective pairing to ensure that the thresholds and conditions being met are relevant and appropriate.

Step 2: Doing No Significant Harm (DNSH)

If an activity makes a substantial contribution to one of the six environmental objectives, that same activity must at the same time do no significant harm to the remaining environmental objectives. The DNSH principle ensures that the economic activity being screened does not interfere with achieving other environmental objectives. Relevant and respective TSCs are defined for each activity-objective pairing to determine whether or not an activity passes the DNSH criteria.

Step 3: Complying with Minimum Social Safeguards

The final step to determining your Taxonomy alignment requires companies to show that they adhere to minimum social safeguards (MSS) as a whole. As per Article 18 of the EU Taxonomy, means that you must either present, if available, or implement procedures that abide by the OECD Guidelines on Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, and the ILO Core Labour Conventions.

Step 4: Calculating your financial KPIs

Once you have completed your alignment screening, the KPIs can be calculated. For each financial KPI (turnover, CapEx, and OpEx), you will need to report the percentage of total turnover, CapEx, and OpEx that is associated with EU Taxonomy-eligible activities and the percentage that is associated with EU Taxonomy-aligned activities.

Let’s take a look at an example: When a company, for example, engages in four activities, where only three are EU Taxonomy-eligible and the percentage of total turnover associated with these activities sums to 75%, the company can be considered 75% Taxonomy eligible. If of those eligible activities, only two activities meet the technical screening criteria for making a substantial contribution, three eligible activities comply with their Technical Screening Criteria for doing no significant harm and the company as a whole complies with the minimum social safeguards, then only the initial two activities can then be considered Taxonomy aligned. The percentage of total turnover associated with these activities sums to 65%, so this company can be considered 65% EU Taxonomy aligned.

Step 5: Completing your report and making disclosures

You are now ready to compile this information into the European Commission’s standard reporting template and make your disclosures. The EU standard reporting templates can be found in the Annexes of the Disclosures Delegated Act, and require all the eligibility and alignment details and information produced in the implementation steps outlined above.

What to keep in mind:

• Total turnover, CapEx, and OpEx are the denominators needed to determine what percentage of the company’s activities are Taxonomy eligible and what percentage of the company’s activities are Taxonomy aligned.
• An activity can have more than one environmental objective, but it is important that the activity’s eligibility and alignment should only be counted once.
• The turnover, CapEx, and OpEx associated with each EU Taxonomy-eligible activity are needed in order to determine the percentage of activities that are Taxonomy eligible and aligned, as well. Once aggregated across eligible and aligned activities, these sums act as the numerators in KPI calculations.
• Assessing your Taxonomy alignment requires plenty of time, research, documentation and evidence.

How Can Greenomy Help?

Assessing your alignment and implementing the EU Taxonomy can be challenging, time-consuming and costly. Greenomy helps companies to determine both their eligibility and alignment scores by digitising 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.