What does the EU taxonomy mean for SMEs?

What is the EU-taxonomy?

The classification of sustainable economic activities (EU taxonomy) is intended to strengthen the financing of sustainable growth in the European Union (EU). The legal basis is the Taxonomy Regulation of the European Parliament and Council, which came into force on July 12, 2020. In contrast to directives, which are transposed into national law by the EU countries, the Taxonomy Regulation has been applicable throughout the EU(application of EU law) since the day it came into force

By establishing a uniform sustainability classification, the EU taxonomy aims to channel capital flows to sustainable projects, exploit financing potential to promote low-emission technologies and close the investment gap in financing climate targets on the financial market in the long term. Due to the long-term risks of climate change, an economic reorientation to mitigate and adapt to climate change is not only in the public interest, but also in the private interest of long-term investors such as pension funds, insurance companies and asset managers. However, there is a need for uniform criteria in order to recognize sustainable economic activities and develop suitable financing instruments on the financial market. Specifically, the EU taxonomy defines four environmental objectives in addition to climate change mitigation and adaptation, which are shown in Figure 1. In order to be classified as taxonomy-compliant and therefore sustainable, an appropriate economic activity must be assigned and fulfill the following four criteria:

1. It must make a significant contribution to at least one environmental objective.
2. It must not significantly impair any of the other environmental objectives.
3. It must meet minimum safety standards to avoid a negative social impact.
4. It must meet technical selection criteria developed by the EU Technical Expert Group.

The taxonomy recognizes three types of activities:
 

• "Green" activities make a direct contribution to the fulfillment of one or more environmental goals, such as emission-free energy generation or energy-efficient building refurbishment.
• Enabling activities provide complementary support to other activities in achieving an environmental goal, such as data services to optimize the management of renewable energy networks or the manufacture of components for low-carbon technologies (strict additional requirements apply here).
• Transition activities are those for which there is not yet a_low-carbon alternative, but which support the transition to a climate-neutral economy. However, they must be compatible with the long-term goal of climate protection. Energy generation through nuclear power is considered a transition activity.

 

Which companies are affected by the EU taxonomy?

The EU taxonomy is a classification and structuring system. The scope for a climate protection assessment based on the EU taxonomy includes regulations for a total of 13 sectors, which are responsible for almost 80 percent of direct greenhouse gases and in which 40 percent of listed companies across the EU are active(link). These include economic activities in the energy, manufacturing, transportation, forestry and building sectors.
 

The classification of the EU taxonomy is applied via two sets of rules for companies and banks (Figure 2). Banks and investment companies must align their lending and investments with sustainability goals via the disclosure requirements in the financial services sector, the Sustainable Finance Disclosure Regulation(SFDR). The SFDR was adopted in 2019 and came into force in March 2021. It was implemented for various financial products in two stages in 2021 and 2023. Since then, financial institutions have increasingly been requesting sustainability information from their customers.

Companies must comply with the EU taxonomy as part of the Non-Financial Reporting Directive ( NFRD), which will be replaced by the Corporate Sustainability Reporting Directive ( CSRD ) by 2025. The NFRD affects all large listed companies, banks and insurance companies with more than 500 employees and therefore around 11,700 companies in the EU. Under the NFRD, companies are required to disclose information on the extent to which they take account of environmental, social and employee concerns, human rights and the fight against corruption and bribery in their work and business model. In order to expand reporting obligations and introduce common European reporting standards, the European Commission, the European Council and the European Parliament agreed on a new EU Corporate Sustainability Reporting Directive ( CSRD) on June 21, 2022, which came into force on January 5, 2023 and whose provisions must be implemented by the member states within 18 months. The CSRD is an update and strengthening of the NFRD.Under the CSRD, the number of companies subject to reporting requirements increases to 49,000 across the EU. In contrast to the NFRD, small and medium-sized enterprises (SMEs) that are capital market-oriented and large subsidiaries of international groups are also included. Micro-enterprises are excluded from the scope of application. However, corporate customers subject to reporting requirements can demand sustainability reports from their suppliers, meaning that the CSRD also has an indirect impact on smaller companies. Smaller companies should therefore also familiarize themselves with sustainability reporting.    

The reporting requirements of the CSRD will initially only apply to public interest entities with more than 500 employees for the financial years from 2024 (reporting in 2025). However, they will then be successively expanded. From 2025, other large companies under accounting law as well as large banks and insurance companies will also be covered if they have more than 250 employees, a balance sheet total of more than EUR 25 million or generate more than EUR 50 million in annual turnover. From 2026, capital market-oriented companies and small and medium-sized enterprises (SMEs) under accounting law will also fall within the scope of the CSRD. This is intended to close existing gaps in reporting regulations and introduce common European reporting standards in order to further increase transparency with regard to the sustainability of economic activities on the capital market. The counterpart to the CSRD, which concerns companies in the real economy, the SFDR is aimed at financial institutions. They must disclose information in accordance with the EU taxonomy and the CSRD (Figure 2). 

An important part of sustainability reporting is the _carbon footprinting of individual products, production processes and companies. Various activities and software tools are available for this purpose.

 

Where can I find reliable and helpful information?

Up-to-date information on the topic with links to the legally binding original documents and an EU Taxonomy Navigator can be found on the European Commission's website. The website of the Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (BMUV) also offers an FAQ on the EU taxonomy and its legal basis. The IW also produced a comprehensive study on the topic in 2021. There are now also a number of specialized consulting and support institutions (publicly funded institutions or management consultancies) for the EU taxonomy and sustainability reporting, as well as software and tools for automated reporting, networks and multipliers for events and newsletters. The information and background to the EU taxonomy is freely available on the relevant homepages. Examples include
 

• Ecocockpit of the Efficiency Agency NRW,
• EU Taxonomy Info (from Envoria),
• Ecoflex (from Cobago) or
• Substain from (ConClimate).