EU Taxonomy Report
The international research institution CDP (Carbon Disclosure Project) releases a report on the EU taxonomy, aiming to analyze the role of the EU taxonomy in the transition economy, as well as the situation of company information disclosure.
CDP uses a questionnaire to study the information disclosures of 1,700 companies based on the EU taxonomy. These information disclosures are required by the EU Non-Financial Reporting Directive (NFRD) and focused on key Performance indicator (KPI).
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Background of EU Taxonomy
The EU Taxonomy is the world’s most recognized public sustainable finance taxonomy, defining criteria for how economic activities are aligned with environmental objectives. The EU taxonomy contains a total of six environmental goals, of which climate change mitigation and climate change adaptation have already taken effect in the EU. The remaining four environmental goals (sustainable use of water resources, circular economy transition, pollution prevention and biodiversity protection) will be implemented in 2024.
At present, more than 1,800 companies have disclosed based on the NFRD’s requirements the proportion of company activities that comply with the EU taxonomy, the screening criteria for these activities, and whether they do not cause significant damage to other environmental goals (Do No Significant Harm, DNSH). In this study, CDP focused on two indicators: climate change mitigation and climate change adaptation.
EU Taxonomy and Economic Activity
CDP research found that the industrial, financial and consumer discretionary industries accounts for the highest proportions of all companies, which is why the market industry proportions in Europe remain consistent. Companies mainly report whether their economic activities are consistent with environmental goals through revenue, capital expenditures (CapEx) and operating expenses (OpEx), with relatively less disclosure of operating expenses.
The findings show that 25% of revenue and 30% of capital expenditures of the company group meet the taxonomy requirements, with higher proportions in utilities, materials industries, and industrials. In terms of countries, a higher proportion of companies are headquartered in Norway, Austria, and Greece. More than two-thirds of companies says they will continue to increase the proportion of eligible economic activity as a financial planning tool in the future to drive corporate transition and support climate goals.
EU Taxonomy and Carbon Emissions
CDP finds that of 1,700 companies, about 600 have included their income and expenses as part of their transformation plans, and about 300 have implemented carbon emission indicators based on the Science-Based Targets Initiative (SBTi). However, the largest sources of corporate emissions may not be reflected in revenues, resulting in no clear correlation between carbon emission intensity and the consistency of economic activity in a revenue-based taxonomy.
In addition, companies may be more inclined to increase capital expenditures in the practice of reducing carbon emission intensity. These capital expenditures will affect CapEx, and the reduction in carbon emission intensity caused by future investments cannot be demonstrated in the current data. Therefore, there is no obvious correlation between carbon emission intensity and the consistency of economic activities based on the CapEx taxonomy.
Next Steps for EU Taxonomy
CDP believes that the EU taxonomy will continue to expand in scope, with companies required to publish whether their economic activities comply with four additional environmental indicators in 2024, and the consistency of their economic activities in 2025. In addition, credit institutions, asset managers and insurance companies are also required to report the percentage of their activities that comply with the taxonomy based on specific KPIs.
The information required by companies to disclose under the EU Taxonomy has become an important research resource for CDP and other institutions. CPI will continue to explore the relationship between the taxonomy and the transition plan to help companies, investors and regulatory agencies understand the taxonomy.
Reference:
2023 EU Taxonomy Report
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