Climate Taxonomy Reporting Rules Effective
01/10/2022 - Reading time: 5 minutes
As of 1 January 2022, companies must begin adequate reporting according to the EU Taxonomy in order to fulfill the disclosure requirements under the Non-Financial Reporting Directive (NFRD) and the Taxonomy Regulation.
The Taxonomy Regulation (Regulation (EU) 2020/852) – already in force since 12 July 2020 – introduced a European Union-wide classification system (taxonomy) for environmentally sustainable activities with the aim of facilitating primarely financial market participants to invest sustainably. Amending the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) the Taxonomy Regulation is stipulating the criteria for an economic activity of a business to be met in order to be considered as environmentally sustainable and imposes additional disclosure obligations for companies addressed by the Non-Financial Reporting Directive (NFRD) with respect to environmentally sustainable economic activities.
In order for an economic activity to qualify as environmentally sustainable within the meaning of the Taxonomy Regulation it must fulfill four requirements. Firstly, it must make a significant contribution to at least one of the following environmental objectives:
- climate change mitigation;
- climate change adaptation;
- the sustainable use and protection of water and marine resources;
- the transition to a circular economy;
- pollution prevention and control; or
- the protection and restoration of biodiversity and ecosystems.
Furthermore, the economic activity must not do significant harm to any other of the mentioned environmental objectives and has to comply with robust and science-based technical screening criteria as well as with minimum social and governance safeguards.
The Taxonomy Regulation is further complemented by the EU Taxonomy Climate Delegated Act (Delegated Regulation (EU) 2021/2139), adopted by the European Commission on 4 June 2021, establishing the technical screening criteria (TSC) for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives. The Delegated Regulation comprises over 85 economic activities and environmental objectives and therefore far more activities and objectives than previous frameworks. In this context it is still discussed as a hot topic whether nuclear and gas energy are to be considered as sustainable activities.
The Delegated Regulation was published on 9 December 2021 and is partially applicable as of 1 January 2022.
Since 1 January 2022, companies must begin reporting according to the EU Taxonomy in order to fulfill the disclosure requirements under the Non-Financial Reporting Directive (NFRD) and the Taxonomy Regulation. The market participants covered by the NFRD, which is applicable to large public-interest companies with more than 500 employees including for example listed companies, banks, insurance companies and other companies designated by national authorities as public-interest entities, will have to further report on the taxonomy eligibility of their climate change adaptation in respect of specific economic activities and respective mitigation efforts in relation to 2021.
With the purpose to clarify questions relating to disclosures under Article 8 of the Taxonomy Regulation, including matters related to the EU Taxonomy Climate Delegated Act, the European Commission issued a Q&A with guidance on Taxonomy eligibility reporting entitled “How should financial and non-financial undertakings report Taxonomy-eligible economic activities and assets in accordance with the Taxonomy Regulation Article 8 Disclosures Delegated Act?” on 20 December 2021.
Although this Q&A is a legally non-binding guide, it can be of valuable support in practice for banks, investors, insurers and non-financial entities to prepare for EU taxonomy-eligible disclosures. Overall, the Q&A provides answers to 22 questions, including highly practically relevant guidance on questions such as what assets are in scope of Taxonomy eligibility reporting for financial undertakings and whether life insurance qualifies as a taxonomy eligible activity.