How to navigate EU Taxonomy's complex rules

The analysis presented in this report offers significant insights into Taxonomy disclosure practices across Europe:

• The Taxonomy Regulation mandates that companies provide a qualitative description of their determination and allocation methods for Taxonomy KPIs, referred to as the “accounting policy.” This year’s edition of the EY EU Taxonomy Barometer indicates that 88% of nonfinancial undertakings within the scope (271 out of 307) have complied with this qualitative disclosure requirement, marking a 9% increase from FY 2022.
  
  
• Approximately one in 10 nonfinancial undertakings — 31 out of 307 — has restated eligibility or alignment for some data published in the previous reporting year.
  
  
• Almost 35% of nonfinancial undertakings in scope (107 out of 307) have incorporated additional tables in their Taxonomy disclosures, concerning taxonomy-eligible and taxonomy-aligned activities related to fossil gas and nuclear energy.
  
  
• The new additional table required for nonfinancial undertakings to disclose the percentage of eligibility and alignment for each environmental objective of Taxonomy activities has been included in the disclosures by 47% of the undertakings in scope — 145 out of 307.
  
  
• Approximately 27% of Taxonomy disclosures (83 out of 307 nonfinancial undertakings) have been assured by an independent auditor. Of these, over 60% (52 out of 83) were from Spain, where assurance is mandatory, and Germany, where assurance is a common practice for most undertakings (93.5%), even though it is not legally required. Of the seven companies that received reasonable assurance, six were listed in Germany and one in Spain for their Taxonomy disclosure.

The average share of eligibility and alignment can vary by country and sector. According to the EU Taxonomy Barometer 2024, companies disclosed an average share of eligible turnover and OpEx at 35%, while CapEx was higher at 43%. Key observations include:

• In line with last year’s results, CapEx maintains the highest eligibility percentage among the three Taxonomy KPIs, showing a notable 7% increase compared with the previous year. This may be attributed to the fact that CapEx also includes the purchase of output from Taxonomy-aligned economic activities.
  
  
• Consistent with previous years, turnover and OpEx show similar patterns of eligibility, being mostly related to the core business activities of the undertakings.
  
  
• CCM continues to dominate the eligibility share among the six objectives of the EU Taxonomy, contributing to 25% of the 35% total result for turnover KPI, 38% of the 43% total result for CapEx KPI, and 30% of the 35% total result for OpEx KPI.
  
  
• For FY 2023, the eligibility shares for the four environmental objectives included in the Environmental Delegated Act were modest, peaking at 3% for each KPI. It is important to highlight that the newly added objectives encompass less than 40 activities, in contrast to the first two objectives, which cover over 100 activities.

Regarding alignment, companies reported an average of 10% turnover, 16% CapEx, and 12% OpEx. In line with FY 2022, CapEx continued to show the largest discrepancy between eligibility and alignment (27 percentage points), while turnover and OpEx had smaller gaps (25 and 23 percentage points, respectively). A significant gap between eligibility and alignment quantifies a company's ability to conduct activities sustainably (alignment) versus its potential to do so (eligibility). Moreover, such a discrepancy may negatively impact the company’s ability to attract investments from external parties. A significant gap between eligibility and alignment should drive a company’s investment strategy toward sustainability, aiming to increase the percentage of KPIs that can contribute to one of the six environmental objectives.

Compared with the previous edition of the EY Taxonomy Barometer, there has been a general increase in the percentages of eligibility and alignment for all three KPIs. The rise in eligibility for each KPI can partly be attributed to the introduction of four new environmental objectives. Meanwhile, the slight increase in alignment may be due to factors, such as the intrinsic experience gained from the previous year and the implementation of a stronger reporting infrastructure.

Turnover

The EU Taxonomy Barometer 2024 shows a notable increase in the eligibility percentages for turnover, which climbed from 25% in the reporting year 2022 to 35%, marking the most substantial growth among the three KPIs. Notably, the alignment share for the CapEx KPI also increased from 15% to 16%, as well as the Turnover KPI from 8% to 10%. It is important to point out that about one in five companies in scope — 56 out of 307 (18%) — reported 0% of eligible turnover, a sharp decline from the 34% in FY 2022. Half of the companies — 155 (50%) — reported 0% of aligned turnover, a slight decrease from 54% in fiscal year 2022.

As illustrated in the graph above, the average share of eligibility and alignment can significantly vary across countries. Luxembourg continues to have the highest percentage of eligible turnover (66%), with Romania following with 51% (four companies), which is also leading in alignment share with an impressive 49%, far surpassing Luxembourg’s 31% (one company), second-best in ranking. Conversely, Slovakia (one company) has the lowest percentage of eligible turnover at 4%.

Among the 22 countries in scope, Ireland, Malta and Slovakia generally report a 0% of alignment (0.34% for Ireland). Croatia, the Netherlands (17 companies), Slovenia (five companies) and Sweden (21 companies) show minimal shares of alignment (1%). Croatia (41% — 14 companies), Ireland (39% — seven companies), Germany (37% — 31 companies), the Netherlands and Luxembourg (35%) have recorded the highest gaps. For the Dutch companies, the gap increased from 9% to 35% and this is related to eligibility associated with the new environmental objectives, which do not mandate the disclosure of alignment; therefore, the eligible turnover increased, while the aligned turnover stayed the same.

Average eligibility and alignment can also vary widely across industries. For the turnover KPI, as in FY 2022, the top three most eligible sectors remain mobility (73%); construction, infrastructure and real estate (72%); and power and utilities (50%), with the consumer products sector registering the lowest eligibility at 3%. The sectors with the highest alignment are power and utilities (37%); mining and quarrying (23%); and construction, infrastructure and real estate (14%).

The mobility sector, in particular, exhibits the largest gap between eligible and aligned turnover (65%), due to the widespread difficulty companies in this sector face in complying with technical screening criteria (TSC). Furthermore, the construction, infrastructure and real estate sector also shows a significant gap (58%), based on the evidence collected during the analysis. The primary cause for the nonalignment is the failure to meet the substantial contribution criteria (SCC) and do no significant harm (DNSH) criteria, which have proven to be a considerable obstacle.

CapEx

In line with the 2023 edition, CapEx presents the highest eligibility percentage among the three Taxonomy KPIs at 43%, showing a notable 7% increase from the previous year. The average share of Taxonomy-aligned CapEx also experienced a slight increase, reaching 16% compared with 15% in FY 2022.

While only a small fraction of companies — 13 companies out of 307 (4% of the sample) — reported 0% CapEx eligibility, significantly down from 12% in the 2023 edition, the proportion of companies reporting 0% alignment is considerably higher at almost 36% (109 companies out of 307). The low number of companies with 0% CapEx eligibility is likely due to the inclusion of CapEx related to eligible turnover and investments aimed at reducing greenhouse gas (GHG) emissions, such as those connected to activity 7.2, Renovation of existing buildings of the CCM objective. The higher number of companies with 0% alignment may indicate challenges in meeting the TSC.

The graph below displays significant differences in average eligibility and alignment across countries. The Czech Republic (73%; one company), Luxembourg (72%) and Slovakia (60%) present the highest eligibility for CapEx. This variation from the top three in turnover may be due to the inclusion of investments targeting GHG emission reductions within the CapEx KPI. Conversely, Sweden (26%; 21 companies) and Slovenia (24%; five companies) report the lowest percentages of eligible CapEx, which are still significantly higher than the lowest percentages for turnover and OpEx.

The Czech Republic also leads in average aligned CapEx (67%), followed by Luxembourg (41%), and Greece and Spain (30%). Ireland, Malta and Slovakia, however, show the lowest share of aligned CapEx at 1% and 0%.

When examining the disparity between average CapEx eligibility and alignment, Slovakia (one company) stands out with a substantial 60% deviation.

In line with last year's findings, the power and utilities sector (75% eligibility and 61% alignment); mobility (72% eligibility); and construction, infrastructure and real estate (66% eligibility) continue to have the highest eligibility rates. The lowest eligibility percentages are seen in oil and gas (23%); technology, media and telecommunications (25%); and consumer products (29%).

Regarding alignment, mining and quarrying (21%); and construction, infrastructure and real estate (19%) trail behind power and utilities in the top-aligned sectors. In contrast, technology, media and communication, consumer products (both 4%); and health, biotechnology and chemicals (3%) sectors show the lowest alignment levels for CapEx KPI.

Similar to turnover, the mobility sector has the largest gap between average eligibility and alignment (56%), followed by construction, infrastructure and real estate (47%). The range of gaps across sectors stretches from 56% in mobility to 7% in oil and gas.

OpEx

In line with the trends observed in the EY EU Taxonomy Barometer 2023, OpEx continues to mirror turnover with similar eligibility and alignment percentages. Eligibility for OpEx has risen from 28% to 35% since last year, while alignment remains stable at 12%. Out of the 307 companies in scope, 64 (21%) reported 0% eligibility, while 152 (50%) reported 0% of alignment. It is important to note that the Regulation allows companies to disclose just the value of the OpEx denominator, indicating the eligibility as 0%, when OpEx is considered “not material” to their business model. Out of the 307 companies in scope, 29 (9%) used the so-called "exempt from reporting" option for the OpEx KPI.

The country-level data for 2023 shown below indicates that, as for turnover, Luxembourg leads in OpEx eligibility at 67%. The Czech Republic stands out with 64% eligible OpEx and a high alignment rate of 46%. In line with last year, Austria (11 companies) reports 48% eligible OpEx (highest average eligibility share in 2023 edition) and has improved its alignment to 20%.

Conversely, Slovakia remains at the lower end of the spectrum with only 2% eligible OpEx and 0% reported alignment. Hungary and Slovenia also have lower eligibility rates at 18% and 10%, respectively, with Hungary reporting 10% alignment and Slovenia at 6%.

In relation to the disparity between average eligibility and alignment, Malta (45% — seven companies) and Ireland (42% — seven companies) show the largest gaps.

The power and utilities sector shows the highest OpEx eligibility at 66%, followed by the mobility sector — encompassing vehicle manufacturing and transport — at 65%, and construction, infrastructure and real estate at 57%. The lowest shares of eligibility OpEx are in technology, media and telecommunications (18%), consumer products, and oil and gas (17%).

In terms of alignment, power and utilities lead at 49%, a slight increase from 48%, with mining and quarrying at 28%, up 5% from last year. The consumer products sector has a small increase in alignment to 2%, and the health, biotechnology and chemicals showed marginal improvement to 3% aligned OpEx.

The mobility sector now shows a 50% gap between 65% average eligibility and 15% alignment. Similarly, construction, infrastructure and real estate also has a 46% gap, a significant rise from the previously reported 36%.

The analysis in the following sections of the report provides insights into Taxonomy disclosure practices among financial undertakings in Europe:

• Out of 79 financial undertakings, 15 did not provide the relevant Taxonomy disclosures in either their FY 2023 annual report or sustainability report.
  
  
• As expected, disclosed templates were limited to Taxonomy eligibility and alignment for climate-related environmental objectives. Voluntary information on the other four environmental objectives was absent, with financial undertaking citing unavailability of data from counterparties as the reason.
  
  
• A substantial 75% of financial undertakings in scope (59 out of 79) included the additional templates on Taxonomy-eligible and Taxonomy-aligned activities related to fossil gas and nuclear energy in their Taxonomy disclosures. Among these, 39 financial undertakings published all the related templates based on both turnover and CapEx.
  
  
• Only 22% of Taxonomy disclosures (17 out of 79) were assured by an independent auditor. Of these, over 64% (11 out of 17) were from Spain (where assurance is mandatory) and Germany. Almost all the assurances provided were limited, with only one insurance undertaking obtaining reasonable assurance.
  
  
• Some insurance companies restated eligibility on data published in the previous reporting year.
  
  
• Due to new reporting requirements introduced for FY 2023, it is not possible to compare the current disclosures with those from previous years.

Credit institutions

The contribution of banks to the EU’s environmental objectives is reflected in the Taxonomy-eligibility of exposures financing economic activities and assets. This indicates the banks’ potential contribution of the credit and investment portfolio to the environmental objectives, with figures ranging from 0% to 88.25% and an average of 33.24%. On the other hand, credit institutions have reported Taxonomy alignment of exposures financing economic activities and assets for the first time, displaying the banks’ actual contribution of the credit and investment portfolio to the environmental objectives.

The key metric, known as the GAR stock, specifies the proportion of relevant Taxonomy-aligned assets to the total covered assets. The range for GAR stock based on turnover is from 0% to 10%, with an average of 1.77%, and for GAR stock based on CapEx, it also ranges from 0% to 10%, with an average of 2.01%.

In addition to the GAR, banks have reported the following mandatory additional KPIs for the first time:

• GAR (flow): This KPI indicates the inflow of new Taxonomy-aligned assets relative to the total covered assets. It ranges from 0% to 10.40%, with an average of 1.90% for GAR (flow) based on turnover, and from 0% to 23.90%, with an average of 3.02% for GAR (flow) based on CapEx.
  
  
• Financial guarantees (FinGuar): This KPI shows the proportion of Taxonomy-aligned financial guarantees in relation to the total covered financial guarantees. It ranges from 0% to 25%, with an average of 2.32% for FinGuar based on turnover, and from 0% to 42.50%, with an average of 5.50% for FinGuar based on CapEx.
  
  
• Assets under management (AuM): This KPI indicates the proportion of Taxonomy-aligned assets under management in relation to the total covered assets under management. It ranges from 0% to 84%, with an average of 3.48% for AuM based on turnover, and from 0% to 92%, with an average of 4.47% for AuM based on CapEx.

Banks’ exposure to Taxonomy-eligible and Taxonomy-aligned assets mainly includes retail mortgages and consumer loans for vehicles and building renovation.

The compilation of mandatory templates has become more challenging due to the extensive information required and the introduction of complex templates for the additional KPIs. This has also led to increased interpretative uncertainties. The taxonomy disclosures have increased significantly compared with FY 2022, with the number of pages peaking at 90 for the taxonomy templates without consideration of the qualitative disclosures.

Almost all banks calculated their KPIs using both their counterparties’ turnover and CapEx and published the information in separate templates. Moreover, the nuclear and fossil gas templates were disclosed for the first time by the majority of the banks.

Insurance undertakings

The contribution of insurance companies to the EU’s environmental objectives is expressed by two key metrics:

• Underwriting KPI: This reflects the actual contribution of the insurers’ underwriting portfolio to CCM and CCA. The range for this KPI is from 0% to 9.8%, with an average of 2.6%.
  
  
• Investment KPI: This indicates the actual contribution of the investment portfolio to the climate objectives. The alignment share for CCM is still the highest, with ranges from 0.13% to 3.37% based on turnover (average of 1.69%) and from 0.17% to 5.34% based on CapEx (average of 2.41%).

When comparing the two KPIs, insurers contribute more to climate-related objectives through their underwriting activities in relative terms. However, in absolute terms, the potential contribution through the investment portfolio is much larger due to its size. All insurers calculated their Taxonomy-aligned activities using both their counterparties’ turnover and CapEx.

However, as Taxonomy alignment information is based on investee companies’ disclosures, insurers faced challenges in obtaining the necessary data from their counterparties. Typically, the KPIs only included nonfinancial investee undertakings, as alignment data from financial undertakings was not readily available.

In a comparison between banks and insurers, banks’ Taxonomy-aligned assets appear relatively higher than those of insurers. This may indicate that banks are “greener” than insurers, but the difference is primarily due to data availability, which is influenced by the business model and the extent of access to information about counterparties.

It is expected that the investment KPI will further increase as data availability and quality continue to improve. This expectation is supported by the coverage ratio, which represents the share of assets covered by the KPI in relation to total assets. Insurers’ coverage ratio is relatively higher than that of banks, indicating a more comprehensive scope of reporting.

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.

Summary

As the EU works to transform into a modern, resource-efficient and competitive economy with net-zero greenhouse gas emissions by 2050, the Taxonomy Regulation will become more critical to business KPIs.

The third EY EU Taxonomy Barometer results highlight opportunities to improve and clarify both information gathering and identification of activities that contribute toward the EU’s environmental objectives.