The 2024 Taxonomy reporting practices show a notable increase in efforts by undertakings to meet disclosure requirements, with new activities added through both the Environmental Delegated Act and amendments to the Climate Delegated Act. Hence, it is imperative that companies continue to develop a robust reporting infrastructure and enhance the quality of sustainability information to align with the standards of financial reporting.
Based on the examination of sample disclosures and the experience gained from assisting undertakings in preparing both qualitative and quantitative information on the EU Taxonomy, the following have been identified as the main challenges in reporting practice:
- Complex KPI disclosure template: The extensive information required for each KPI, combined with a new and more complex template and the introduction of additional tables, has increased the difficulty and interpretative uncertainties in compiling mandatory templates.
- Information sourcing difficulties: Despite requiring only the eligibility for the other four environmental objectives, the 2023 disclosures demanded a far greater volume of information, which was not directly available and needed to be collected. Some companies faced challenges in the process of documentation collection to provide sufficient evidence for their alignment analysis and may have adopted a conservative approach as a result.
- Persistent room for interpretation: Despite the FAQs published by the European Commission in the final version, uncertainties regarding the interpretation of certain aspects of the Taxonomy Regulation persisted. Additionally, there has been a lack of sufficient guidance on the updates introduced by the Environmental Delegated Act, which the Commission has yet to fully address.
- Meeting the TSC: The introduction and amendment of TSC, often rendered stricter than before, added complexity to the alignment assessment. Many undertakings found themselves not adequately prepared to provide the required information. Furthermore, while some TSC align with local and European regulations, their application to activities conducted outside Europe presented difficulties in ascertaining alignment expectations.
- Minimum safeguards uncertainties: There remained uncertainties regarding how to address the requirements of Article 18 of the Regulation, leading to interpretative doubts about what should be considered “minimum” in reference to safeguards.
Overcoming these difficulties requires ongoing study and training in relation to a regulation that is continuously evolving. Disclosures will need to be increasingly comprehensive, which may call for an adaptation of internal information collection systems. Moreover, to overcome some of the alignment gaps, companies may be required to make investments that allow them to meet the TSC.
In anticipation of the additional requirements set to take into effect in the coming years, it is essential to prepare for what lies ahead and beyond.
The evolution of Taxonomy reporting:
Overall, the disclosure requirements continue to pose significant challenges for companies reporting Taxonomy-related information. Starting from next year, conducting alignment assessments on four other environmental objectives will demand greater effort and an enhanced reporting infrastructure to bridge the gap between financial KPIs and sustainability requirements. Consequently, further guidance through additional documents (e.g., FAQs and Commission notices), and dialogue between institutions and businesses are necessary to ensure a coherent approach across sectors.
The connection with the Corporate Sustainability Reporting Directive (CSRD):
The CSRD, approved by the EU Council and EU Parliament in November 2022, mandates that companies covered by it will be required to have their sustainability statements, including their Taxonomy reporting, verified by an independent auditor. Mandatory assurance on Taxonomy disclosure will require companies to prepare in terms of documentability of their analysis on eligibility and TSC.
The connection to the European Green Bonds:
For FY 2023, the Council has enacted a regulation that establishes a European green bond standard, setting uniform requirements for issuers who wish to designate their bonds as European Green Bonds (EuGB). By leveraging the EU Taxonomy criteria, this voluntary standard strengthens its position as a benchmark for investors and companies aiming to make significant contributions to the EU’s environmental goals. This link with the Taxonomy Regulation will significantly increase the focus on the quality of information regarding eligible and aligned activities, particularly for financial institutions.
In conclusion, the impending enforcement of the CSRD and the integration of the EU Taxonomy with Green Bond standards underscore an enhanced scrutiny of sustainability disclosures. Investors, as key stakeholders, are particularly alert to these developments. Their increasing emphasis on sustainable investment practices means that the quality and comprehensiveness of a company's sustainability reporting will significantly impact its capital-raising capabilities. Therefore, robust and transparent sustainability reporting will improve not just transparency and corporate accountability, but also help to strengthen the confidence of investors and other stakeholders. This confidence is essential for long-term success in an increasingly sustainability-conscious market.