EU Taxonomy explained
EU Taxonomy explained
In 2019, the European Union presented the Green Deal, a set of policy initiatives aiming at several environmental targets, including a climate-neutral Europe by 2050. As part of redirecting capital flows towards sustainable activities, the EU has decided to implement a classification system, an EU “taxonomy” of sustainable activities, with criteria for when they may be defined as sustainable. If your business activity is listed in the taxonomy and you fulfill all criteria, the associated revenue, capital expenditures (CAPEX) and operational expenses (OPEX) with that activity are considered "taxonomy aligned".
The Non-Financial Reporting Directive (NFRD) requires companies with more than 500 employees to report (applicable for approx 11.600 companies) according the the EU Directive 2014/95/EU.
The Corporate Sustainability Reporting Directive (CSRD) is the new EU legislation requiring all large companies to publish regular reports on their environmental and social impact activities. This affects approx 50.000 companies within EU on the 1st of January 2025 (for the 2024 financial year). While the purpose of the CSRD is to revise and strengthen the existing requirements of the Non-Financial Reporting Directive (NFRD). The CSRD reporting standard in EU is called ESRS, the EU Sustainability Reporting Standards and is currently in draft mode, read more here
."The aim of the ESRS is that the standards should be proportionate and not impose an unnecessary administrative burden on companies required to use them. Because of this, the standards will take into account existing standards and frameworks for sustainability reporting and accounting where appropriate. For example, the standards will be built considering the Global Reporting Initiative, the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the International Accounting Standards Board, the Task Force on Climate-related Financial Disclosures, the Carbon Disclosure Standards Board, and CDP (formerly the Carbon Disclosure Project).”
Abbreviations
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SFRD
Sustainable Finance Regulation Disclosure
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ISSB
International Sustainability Standards Board
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SASB
Sustainability Accounting Standards Board
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GRI
Global Reporting Initiative
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SDGs
Sustainable Development Goals
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ESRS
EU Sustainability Reporting Standards
SFDR Regulation
The Sustainable Finance Regulation Disclosure (SFDR) is the regulation requiring financial service providers and owners of financial products to assess and disclose environmental, social, and governance (ESG) considerations publicly. It was developed to improve transparency, which of course helps to prevent greenwashing, as well as to direct capital towards more sustainable investments/ products and businesses.
Which companies have to comply with NFRD reporting
Companies that must comply: EU rules on non-financial reporting currently apply to large public-interest companies with more than 500 employees. This covers approximately 11 700 large companies and groups across the EU, including
- listed companies
- banks
insurance companies - other companies designated by national authorities as public-interest entities
Which companies have to comply with CSRD?
The proposal will extend the scope of NFRD reporting requirements to all large companies, whether they are listed or not and without the previous 500-employee threshold. This change will result in all large companies being held publicly accountable for their impact on people and the environment. This covers approximately 50.000 companies and groups across the EU, including:
- All large companies (2 out of 3 criteria met)
- Revenues > EUR 40 million
- Total assets > EUR 20 million
- > 250 employees
- All companies with listed securities on EU-regulated markets, except micro-undertakings
- Listed SMEs, small and medium-sized enterprises benefit from +3 years for implementation
Timelines:
- 1 January 2024: companies already subject to the non-financial reporting directive (reporting in 2025 for the financial year 2024).
- 1 January 2025: large companies that are not presently subject to the non-financial reporting directive (reporting in 2026 for the financial year 2025).
- 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings (reporting in 2027 for the financial year 2026).
What is GRI reporting?
GRI (Global Reporting Initiative) is the independent, international organization that helps businesses and other organizations take responsibility for their impacts, by providing them with the global common language to communicate those impacts. We provide the world’s most widely used standards for sustainability reporting – the GRI Standards.
What is SASB reporting?
As of August 2022, the International Sustainability Standards Board (ISSB) of the IFRS Foundation assumed responsibility for the SASB Standards. The ISSB has committed to build on the industry-based SASB Standards and leverage SASB’s industry-based approach to standards development.
The ISSB encourages preparers and investors to continue to provide full support for and to use the SASB Standards until IFRS Sustainability Disclosure Standards replace SASB Standards.
SASB Standards identify the subset of environmental, social, and governance issues most relevant to financial performance in each of 77 industries. They are designed to help companies disclose financially-material sustainability information to investors.
ESRS, GRI and SASB differences
The ESRS, GRI and SASB are complementary standards. They fulfill different purposes, apply to different entities and target different audiences. While there is more overlap between the GRI and ESRS, there are also some important differences.
The GRI standards help businesses and other organizations to communicate their ESG impact to a diverse set of stakeholders. The GRI standards apply to all organizations, regardless of ownership form, size or geography. The SASB standards, on other hand, seek to inform providers of capital about how sustainability issues might influence business performance.
The ESRS aims to strengthen the EU’s existing efforts to enable the investment community, consumers and stakeholders to evaluate the sustainability performance of companies. While the ESRS will incorporate essential elements of globally accepted standards, it is likely to go further, to meet the EU’s ambitious sustainability objectives and be consistent with its legal framework. Moreover, the EU’s ESRS will be mandatory for all large companies and for most publicly listed SMEs in the EU, including the subsidiaries of global companies. SMEs will, however, be able to report according to simpler standards and will have a longer phase-in.
EU Sustainability Reporting Standards (ESRS)
The European Union Sustainability Reporting Standards (ESRS) are an upcoming set of EU compliance and disclosure requirements first previewed by the European Commission and the European Financial Reporting Advisory Group (EFRAG) on May 3, 2022. The ESRS are designed to make corporate sustainability and environmental social governance (ESG) reporting within the EU more accurate, common, consistent, comparable, and standardized, just like financial accounting and reporting.
ESEF Regulation
ESEF is a new format in which issuers, who are subject to the obligation to disclose their annual financial report in accordance with the Transparency Directive, must prepare their financial statements..
TCFD Disclosures
The Task Force on Climate-related Financial Disclosures (TCFD) has developed a framework to help public companies and other organizations more effectively disclose climate-related risks and opportunities through their existing reporting processes.
