The European Commission is in the process of further developing the EU taxonomy framework. On 7 May 2021, it published a draft delegated act setting out concrete standards for the disclosure of information on environmental sustainability, as required under the Taxonomy Regulation. Large public interest entities, among others, will need to meet these standards. If the delegated act is adopted in its current form – we expect this to happen later this month – some of the standards will apply to these entities' reporting over financial year 2021.
What information is required?
The EU Taxonomy Regulation provides for an overarching classification system for environmentally sustainable activities. Certain entities must disclose which part of their business qualifies as environmentally sustainable.
An activity is deemed environmentally sustainable if it meets all of the following criteria:
- it contributes substantially to one or more environmental objectives of the regulation (see below)
- it does not significantly harm any of these environmental objectives
- it is carried out in compliance with minimum safeguards
- it complies with certain technical screening criteria
The environmental objectives of the regulation are the following:
- climate change mitigation
- climate change adaption
- sustainable use and protection of water and marine resources
- transition to a circular economy
- pollution prevention and control
- protection and restoration of biodiversity and ecosystems.
Who must report?
Those having to comply with these taxonomy disclosure requirements include large public interest entities. This in turn includes Dutch companies listed on a stock exchange in the EU with: (i) more than 500 employees, and (ii) a balance sheet of more than EUR 20 million or a net turnover of more than EUR 40 million. When we refer to a company in this article, we mean a company meeting these requirements that is not a financial undertaking.
What needs to be disclosed and by when?
Pursuant to the Taxonomy Regulation, a company's annual report (or a separate report) must include information on how and to what extent its activities are associated with economic activities that qualify as environmentally sustainable. This should be done with regard to turnover, capital expenditure and operating expenditure.
As the Taxonomy Regulation only provides a framework, the Commission will adopt various delegated acts specifying what activities qualify as environmentally sustainable and setting out how to comply with the reporting obligations laid down in the regulation. The draft delegated act to be adopted later this month specifies the content and presentation of information to be disclosed.
Based on this draft delegated act, some of the taxonomy reporting obligations are expected to apply soon - to the reporting over the 2021 financial year. The remaining disclosure obligations will enter into force from 1 January 2023.
What particular information must be presented?
Companies will have to disclose:
- how turnover, capital expenditure and operating expenditure were calculated and allocated to the company's different activities, and
- if applicable, how the qualification of those activities as being environmentally sustainable was made.
To make this disclosure, companies will have to allocate their turnover, capital expenditure and operating expenditure to their various activities and qualify these activities as being environmentally sustainable or not. For the 2021 financial year, this allocation will only have to be made for climate change mitigation and adaptation. As of the 2022 financial year, the allocation will also have to cover the other environmental objectives listed above.
The qualification of activities as being environmentally sustainable must be based on detailed descriptions that will be set out in other delegated acts.
A delegated act regarding climate change mitigation and adaptation has already been adopted. This delegated act defines technical screening criteria, categorised by business sector, for economic activities that can make a substantial contribution to climate change mitigation and adaption. Delegated acts regarding the other environmental objectives of the Taxonomy Regulation are expected to be adopted later this year. As mentioned above, they will apply as of 1 January 2023 (and as such encompass the 2022 financial year).