Home 9 Climate 9 The European Green Deal: how the CSRD and EU taxonomy work together

The European Green Deal: how the CSRD and EU taxonomy work together

16.01.2024 | Climate | 0 comments

An overview of the most important facts

  • The EU taxonomy is a classification system based on defined environmental objectives and social minimum standards. It determines which economic activities can be considered ecologically sustainable in the European Union.
  • The Corporate Sustainability Reporting Directive (CSRD) is an EU directive that requires companies to report comprehensively on their environmental, social and governance (ESG) practices in order to increase transparency and accountability when it comes to sustainability.
  • The EU Taxonomy and the CSRD are connected because the taxonomy provides a classification system for sustainable activities. Companies are required to use this system in their CSRD reporting to disclose which of their economic activities align with the taxonomy.

The Green Deal for a climate-neutral Europe

The Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy are key elements within the European Union’s changing environment for sustainable finance and reporting. Both concepts are also integral parts of the European Green Deal, which aims to foster a sustainable economy and make the EU climate-neutral by 2050. Additionally, greenhouse gas emissions are to be reduced by 55% (compared to 1990 levels) by 2030.

To achieve this, various measures are being taken that also affect the private sector and hold it accountable. In doing so, sustainability is integrated into the economy at various points. While the Green Deal provides the overall objective and policy framework, the CSRD and the taxonomy complement each other, playing specific roles in the implementation of this goal.

The CSRD expands and strengthens the requirements for corporate sustainability reporting. It aims to increase the transparency and consistency of the environmental, social and governance (ESG) information published by companies. The EU taxonomy provides a classification system that defines which economic activities can be considered environmentally sustainable. This helps investors, companies and regulators to clearly identify and promote environmentally friendly investments.

For companies in the EU, the introduction of the CSRD and the taxonomy presents both challenges and opportunities. On the one hand, companies have to ensure they comply with the complex requirements and criteria of these regulations. On the other hand, these initiatives also provide companies with the chance to enhance their sustainability practices, boost their appeal to investors, and kick-start sustainable transformation processes that can bring about competitive advantages.

EU Taxonomy: a guide to a sustainable economy

The EU Taxonomy Regulation is designed to provide a definitive and consistent description of what is considered a sustainable economic activity. This is vital because it not only enhances transparency and coherence in the sustainable finance sector but also acts as a catalyst in guiding capital towards more sustainable investments and business models.

The primary goal of the EU Taxonomy Regulation is to change the direction of the European Union’s financial and economic frameworks. This is achieved by explicitly identifying sustainable activities and creating incentives to support them, with the goal being to steer investments towards sectors like the circular economy, renewable energies and biodiversity preservation.

A fundamental aspect of the EU taxonomy is that it defines specific requirements that an economic activity must fulfil in order to be considered sustainable. A crucial part of this process is assigning economic activities to one of the taxonomy activities outlined by the EU. Taxonomy activities are designed in such a way that they make a clear and measurable contribution to achieving at least one of six environmental goals. These objectives include:

  • 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

A key component of the taxonomy is the guideline that sustainable economic actions should not cause substantial damage to other environmental objectives. The “do no significant harm” principle guarantees that endeavours in one area do not detrimentally affect other environmental objectives.

In addition to the environmental criteria, activities must comply with a number of minimum social safeguards. These safeguards relate to aspects such as workers’ rights, equal treatment and quality working conditions, and they are designed to ensure that sustainability initiatives don’t solely focus on ecological aspects but also incorporate social dimensions as well.

The CSRD: transparent sustainability reporting

The introduction of the Corporate Sustainability Reporting Directive (CSRD) marks a significant change in the way companies in the European Union report on non-financial aspects of their business. Effective January 5, 2023, the CSRD will gradually replace the previous Non-Financial Reporting Directive (NFRD), beginning in 2024. This new directive significantly expands the reporting requirements. While around 11,600 companies were previously subject to the NFRD, around 50,000 EU companies will be required to report under the CSRD.

The CSRD requires these companies to provide a comprehensive description of their activities in key ESG (environmental, social, governance) areas in their reports. These include topics such as environmental protection, human rights, social responsibility and diversity. This requirement significantly broadens the reporting obligations and aims to increase the transparency and accountability of companies with regard to sustainability issues.

A key aspect of the CSRD is the newly introduced concept of double materiality. This means that companies must not only report on how environmental changes affect their business activities, but also the opposite, i.e. what impact their business activities have on the environment. This includes social and governance-related impacts as well as environmental impacts. This holistic approach is intended to encourage companies to assess and disclose both the external effects of their activities and the internal risks and opportunities arising from environmental and social factors.

By obliging companies to report more comprehensively on their ESG-related activities and impacts, the introduction of the CSRD signifies an important step towards a more sustainable and transparent way of doing business in the EU.

The CSRD vs the ESRS

To make matters even more complex, it’s also necessary to look at the ESRS when discussing the CSRD. ESRS stands for European Sustainability Reporting Standards. The ESRS are part of the CSRD and serve as guidelines that companies need to follow when compiling their CSRD report. The purpose of the standards is to ensure consistency and transparency in the reporting process.

What is the relationship between the CSRD and the EU taxonomy?

The EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) are two key regulations that play a crucial role in promoting sustainable finance and corporate governance. They are closely linked and enhance each other in terms of their reporting obligations and shared objectives.

The EU taxonomy provides a comprehensive classification system that defines which economic activities can be considered sustainable. This system is not only important in its own right, but also forms the basis for reporting in line with the CSRD.

Under the CSRD, companies are required to publish sustainability data relating to their economic activities. This includes disclosing the proportion of their activities that are EU taxonomy-compliant in terms of turnover, investments and operating costs. Thus, the EU taxonomy-based data becomes an integral part of the CSRD report for companies. This integration ensures that companies not only report on their sustainability efforts, but also measure them according to clear and consistent standards.

Publishing EU taxonomy data as part of the CSRD reporting obligation is an important source of information for other regulations and stakeholders in the financial sector. Financial companies that have to meet certain requirements in relation to sustainable investments depend on detailed and reliable data.

These overlaps and interconnections between EU regulations illustrate how the various initiatives work together to create a coherent and effective system for promoting and measuring sustainability within the European economy and financial sector. They reflect the EU’s ambition to establish a comprehensive and sustainable financial landscape through integrated and mutually supportive regulations.

The significance of the CSRD and EU taxonomy for companies

The EU’s new regulations might initially seem like a dense and complicated maze that’s hard for businesses to navigate. However, there are several advantageous aspects that businesses should consider. This includes the potential for better positioning in the market and a more efficient risk management strategy.

Firstly, these requirements promote greater transparency and accountability with regard to environmental, social and governance (ESG) practices. By consistently reporting on sustainable activities and their impact, companies can strengthen the trust of stakeholders such as customers, investors and business partners. This not only improves the company’s image but can also lead to increased customer loyalty and willingness to invest.

Furthermore, the guidelines set by the EU allow businesses to better structure and optimise their sustainability strategies. Dealing with the requirements of the taxonomy and the CSRD helps in gaining comprehensive insight into how business operations impact different aspects of the environment and society. Having a better understanding can stimulate innovation and lead to models that are more sustainable and more efficient.

Another important aspect is improved risk management. By focusing intensively on ESG factors as part of the EU requirements, companies can identify potential risks earlier and manage them better. This concerns both physical risks arising from environmental changes and transition risks associated with the shift to a more sustainable economy.

Ultimately, these EU directives make obtaining capital easier. Fulfilling sustainability criteria is becoming more important for investors and creditors. Businesses that can prove their sustainable operations and adherence to EU rules may find it easier to secure “green” financial resources and benefit from lower interest costs.

Overall, the EU requirements on sustainability offer companies the opportunity to shape their business strategies for the future, strengthen their social and ecological responsibility and ultimately be successful both economically and in terms of sustainability. We can support you in finding the best strategy for your company and accompany you every step of the way.

What is the EU taxonomy and what role does it play?

The EU taxonomy is a classification system that defines which economic activities can be considered environmentally sustainable. It serves as a guideline for companies and investors to identify and promote sustainable investments.

What does the Corporate Sustainability Reporting Directive (CSRD) include and who does it affect?

The CSRD is an EU directive that requires companies to report in detail on their environmental, social and governance (ESG) practices. Starting in 2024, around 50,000 EU companies will be affected, a significant increase compared to the previous 11,600 companies that were affected by the Non-Financial Reporting Directive (NFRD).

How are the EU taxonomy and CSRD connected?

The EU taxonomy and CSRD are closely connected. As part of their CSRD reporting, companies must disclose the taxonomy-compliant portion of their economic activities (turnover, investments and operating costs) in accordance with the criteria of the EU taxonomy.