Guest post by
Ms. Katja Lewalter-Düssel and Dr. Benjamin Wilhelm,
Cooperative Association – Association of Regions
in the Börsen-Zeitung, special supplement “North Rhine-Westphalia Economic Area”
With the 2018 Action Plan, Europe has set itself on the path to a sustainable economic orientation. The EU's aim is to channel investment into environmentally sustainable economic activities. However, there is neither a model for this path nor much time to test different branches. It is therefore understandable that legal theory does not always reflect real and financial practice.
The big theoretical milestone in sustainability is the taxonomy regulation. The taxonomy classifies different economic activities according to their sustainable impact based on 6 environmental goals. This defines precise criteria for many industries as to what is considered ecologically sustainable from the perspective of the European Union. Ecologically sustainable activities should (1) serve to limit climate change, (2) support adaptation to climate change, (3) avoid environmental pollution, (4) contribute to the circular economy, (5) protect water and marine resources and (6) the Preserve biodiversity on our planet.
According to the Do No Significant Harm criteria (DNSH), the individual goals must not have a significantly negative effect on the others. In addition, minimum social standards must be adhered to by the companies concerned. These specifications are checked based on detailed technical criteria and relevant standards. If the test result is positive, the economic activity in question becomes a green-sustainable economic activity in accordance with the Taxonomy Ordinance.
In practice, however, the picture is usually less clear. During implementation, the positive intention of the action plan to redirect financial flows into sustainable investments through increased transparency is not always immediately obvious. Here it is important to set up new data processing systems, define the necessary data requirements and ensure sufficient data quality for reporting sustainable activities. Existing expertise on financial reporting must therefore increasingly be supplemented by knowledge of non-financial aspects of business activity in order to be able to implement the disclosure requirements in a process-oriented and quality-assured manner.
Expanding the reporting requirement is intended to increase transparency
Only a few companies in Germany are still affected by the disclosure (in relation to the taxonomy regulation). These are those companies that are directly obliged to publish a CSR report due to the European Non-Financial Reporting Directive (NFRD).
With the new European sustainability reporting (Corporate Sustainability Reporting Directive - CSRD), the circle of users will increasingly expand from the 2024 financial year and, according to a study by the German Accounting Standards Committee (DRSC), will affect up to 15,000 companies in Germany. The CSRD will not only increase transparency on sustainability issues, but will also require greater depth in reporting in addition to the requirements of the Taxonomy Regulation. For example, companies must explain to what extent their business activities contribute to climate change or to compliance with the Paris 1.5 degree target. Further reporting items will be required by the soon to be finalized European Sustainability Reporting Standards (ESRS).
The additional transparency should enable investors to align their portfolio allocation and consumers to align their consumption based on the sustainability impact of their decision. In practice, the necessary decision-making authority then lies not only in the hands of companies required to report, but also with their investors and ultimately also with consumers, in that they can “reward” sustainable economic ventures through their purchasing decisions.
A look into business reality
Against the background of the requirements outlined above, it may sound astonishing how focused the (perspectively affected) companies are currently dealing with the new reality of sustainability reporting. The intensity shows that sustainability is not just seen as a threat to the existing business model. Instead, it is recognized that increased transparency about a company's sustainability performance also represents a strategic opportunity to better align the business model. However, three “fictitious” examples of the limits of transparency:
- A trading company wants to offer more sustainable products and products in order to promote authentic sustainability communication. However, at the moment the technical assessment criteria of the Taxonomy Regulation for trading activities do not yet provide any guidelines. The relevant taxonomy key figures for the sustainable economic performance of large trading companies therefore tend to relate to investment expenditure that does not correspond to the activities in the core business. Investments in taxonomy-compliant wind power or solar energy, for example, would be included in reporting taxonomy key figures, but would only inadequately or not at all reflect the actual trading business. The actual sustainability impact therefore remains opaque for this company.
- Citizens come together to form an energy cooperative to promote sustainable energy sources. All projects have the specific purpose of generating sustainable energy and the fulfillment of this purpose can also be continuously proven using digital monitoring. The regional bank that provides support with financing can see the positive financing effect live and can also advise on appropriate funding lines in order to make financing as easy as possible. The regional bank is also required to report and would like to make the sustainability impact of this taxonomy-compliant financing transparent to its stakeholders. However, since the citizens' energy cooperative is not itself a reporting company, these credit items with their positive impact may not be included in the required taxonomy key figure.
- Based on a market survey, a bank recognizes a very high potential for sustainable financing from an ever-growing, ecologically interested buying group. Loans to private customers are included in the taxonomy key figure if they are a loan secured by a mortgage for the purchase, new construction or renovation of a building. The same applies to automobile financing. For all activities there are relatively concrete minimum criteria as to when such financing can be classified as sustainable. However, this requires evidence on the criteria in order not to make an estimate of the sustainability impact of the financed economic activity. In principle, estimated values may not be included in the taxonomy key figure of the reporting bank. The bank sees a good opportunity to demonstrate the sustainable impact of its financing, as there is already an (estimated) high proportion of sustainable properties in the loan portfolio. Due to the rapidly increasing expansion of electromobility in the region, a similar trend can be expected here. Shortly after the new credit processes went live, with which the necessary evidence was collected, the bank noticed that a high number of customers were canceling the credit process prematurely. The existing market potential cannot be increased due to the increased process requirements.
The three examples are intended to show that initial practical experience has been gained with the “unprecedented” challenges of dealing with the taxonomy regulation - although some unintended effects of the existing regulations are evident. The routine among the banks and companies using it is increasing. However, the limitations mentioned can only be partially compensated for by technical solutions. The more practical orientation of the legal requirements is an additional prerequisite for overcoming remaining hurdles on the way to a sustainable economic orientation.
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