ESG Consulting and Management

The EU taxonomy is a tool to support the transition to a low-carbon, resilient and resource-efficient economy.

As a central system for classification and as a catalog of criteria for sustainable activities, it is intended to ensure uniform understanding and contribute to the avoidance of greenwashing. The EU taxonomy also allows classification of when a project, building, or economic activity is deemed ‘sustainable’ and may be classified as ‘sustainable finance’.

As such, the EU taxonomy is a ‘translation’ of the goals of the Paris Climate Agreement and the UN’s Sustainable Development Goals (SDGs).

The EU taxonomy applies across industries and sectors to all key market and economic operators.

In addition to financial market participants such as banks and insurance companies, the EU taxonomy applies primarily to public-interest companies and companies with more than 500 employees. Companies that are required to provide non-financial reporting under the NFRD are also included.

The EU taxonomy also applies to EU member states and their institutions.

Reporting obligations and information disclosure for the 2021 financial year must be completed by 2022 at the latest with regard to the two main objectives of the EU taxonomy, namely climate change mitigation and climate change adaptation.

By 2023, the reporting obligations and disclosure of information for the 2022 financial year will then apply to all six key objectives of the EU taxonomy.

The Technical Expert Group presented recommendations for technical assessment criteria in its final report back in March 2020.
The delegated act on the EU taxonomy was officially presented on June 6, 2021. It requires the players concerned to report annually as part of a due diligence audit in accordance with EU corporate disclosure guidelines and the OECD Due Diligence for Responsible Business Conduct:

• The percentage of sales or project activities that meet the EU taxonomy sustainability criteria.
• Which investment expenses (CAPEX) or operating expenses (OPEX) of the company/project activities meet the sustainability criteria of the EU taxonomy.

Companies and organizations must make their annual reporting on project activities publicly available – for example on the company website or through sustainability reporting.

The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation on the publication of information provided by financial market participants on the sustainability of their investment decisions. It contains numerous transparency regulations at product and entity level as well as disclosure obligations for financial service providers with regard to their consideration of sustainability issues. 

The SFDR differentiates according to whether a financial product merely takes sustainability risks into account (Article 6, SFDR), has or promotes sustainable characteristics (Article 8, SFDR – ‘light green’), or is a product with a clear sustainable investment objective (Article 9, SFDR – ‘dark green’).

The SFDR is aimed at financial market participants as well as financial advisors. Accordingly, financial advisors also include insurance intermediaries, insurance companies, credit institutions and AIFM/OGAW management companies providing investment advice.

The SFDR emerged from the Sustainable Growth Finance Action Plan initiated by the European Commission in March 2018. The Sustainable Finance Disclosure Regulation was promulgated on December 9, 2019 and, with exceptions, will apply from March 10, 2021. The SFDR Level 1 requirements will be supplemented by more detailed Level 2 requirements ("SFDR RTS") and are scheduled to enter into force on January 1, 2022.

The first regulatory impetus here - as is so often the case - is transparency. For example, the SFDR, which came into force on March 10, 2021, obliges financial market participants to inform clients, even in the case of strategies without ESG claims, which sustainability risks are taken into account in the investment decisions and what consequences these risks may have for the financial results (Art. 6). 

For products falling under Article 8 or 9, actors have to report in much more detail. This includes aspects such as how the investment strategy takes into account ESG characteristics or sustainability objectives, details on the ESG objective(s) and a list of the different ones as well as the recording and possible prevention of negative impacts. In addition, there is an overview of the applicable sustainability indicators.

The Corporate Sustainability Reporting Directive (CSRD) is a major update of the EU Non-Financial Reporting Directive (NFRD). The intention is to make sustainability an integral part of reporting and for it to be gradually treated on a par with financial topics.

The EU Commission is proposing several changes to current sustainability reporting practice. Its current proposal stipulates that companies must provide information on the six environmental objectives of the EU taxonomy, on social aspects (e.g. equal opportunity, working conditions) and on governance aspects (e.g. ethics, culture, control and risk management systems).

The current proposal for a directive aims at a significant expansion of the group of companies subject to reporting requirements. This would affect all large companies with an annual average of 250 employees or more, regardless of capital market orientation.

The second threshold for large companies continues to be a balance sheet total of more than 20 million euros or a turnover of more than 40 million euros. In addition, all capital market-oriented small and medium-sized enterprises, with the exception of micro-enterprises (from January 1, 2026), are also affected. 

Following adoption at EU level, the CSRD Directive must be transposed into national law by December 1, 2022 so that it comes into force for businesses. Under the current schedule, the requirements will apply from January 1, 2024 for the 2023 financial year. This would require companies to start collecting the appropriate data and information from January 1, 2023. 

In contrast to previous legislation, organizations will no longer be able to choose where they publish the information. In future, the required information must be included in the management report as part of the annual report, which is to be published no later than four months after the end of the financial year. Furthermore, the publication is to be made available in a machine-readable format to ensure compatibility with the European Single Access Point, which is still to be developed by the EU.

The current EU proposal also includes the obligation to perform an external audit of sustainability information. The audit must examine the compliance of the information with the reporting standards, the process used by the company to establish the reported information, and the tagging in accordance with the requirements of the electronic reporting format, including the indicators referred to in Article 8 of the Taxonomy Regulation. It is currently considered likely that the audit will be expanded in future to cover reasonable assurance.