Wiesbaden, May 14, 2021. A major EU sustainability initiative is currently making many companies nervous: the so-called EU taxonomy. This initiative is intended to establish a unified definition of sustainability throughout Europe for the first time and is extremely complex. But that’s not all: the German federal government is following suit and wants to tighten sustainability criteria for companies significantly.

by Michael Diegelmann und Justus Fischer

EU taxonomy: defining sustainability – in over 600 pages

Anyone investing in sustainable financial products has yet to face the complex question of how “green” the companies in which their money is flowing actually are. A legal definition of what constitutes a sustainable investment is lacking, which leaves a lot of room for greenwashing.

This problem is to be solved by the EU taxonomy: From 2022, products and services must meet certain criteria to be considered sustainable. To do so, companies must prove that their product supports one of the following six environmental goals and does not harm any of the others:

1. 1. Climate change mitigation
2. 2. Climate change adaptation
3. 3. The sustainable use and protection of water
4. 4. The transition to a circular economy
5. 5. Pollution prevention and control
6. 6. The protection of biodiversity and ecosystems

The “„Technical Annex“ to the taxonomy shows that it is not so easy to establish such a definition. It is a kind of lexicon that contains a detailed list of the criteria under which a product or service is considered sustainable. This compendium is already more than 600 pages long – even though concrete requirements are only available for the first two goals (and not even for all sectors).

More and more companies will have to provide information on ESG issues in the future

According to the EU’s will, starting in 2022, every company is to state what percentage of its sales it generates with “taxonomy-compliant” products and what percentage of its capital and operating expenditures can be classified as sustainable. Initially, they will only have to calculate this for the first two targets, but from 2023 they will also have to do so for the others.

But this is not the end of the story for reporting, because further regulations are planned as part of the revised “Non-Financial Reporting Directive” (NFRD): among other things, the EU wants all large companies and all listed companies to prepare an ESG report soon. The only exceptions will be micro-enterprises with fewer than ten employees.

In the future, 50,000 companies in Europe will be required to disclose their sustainability measures, deficits and targets, instead of the current 11,600. The ESG reports will also be subject to much stricter standards. For example, separate sustainability reports will no longer be permitted – companies will in future have to integrate ESG information into the management report and have it checked by an independent (financial) auditor with at least limited assurance. As early as 2024, the EU wants all companies with 250 or more employees and/or sales of 50 million euros to be obliged to provide this reporting – and three years later, listed smaller companies as well.

Germany tightens climate targets

Germany is even going one step further. In May, the German government unveiled a new strategy for sustainable financing and atightening of climate protection legislation. As a result, Germany is to become climate-neutral as early as 2045 (instead of 2050), and emissions are to fall by 65 percent by 2030 (compared with 1990). To achieve this goal, the government has adopted 26 measures designed to mobilize trillions in investment for greater climate protection. These include a (EU-wide) sustainability traffic light for financial products, an expanded sustainability reporting requirement and the reallocation of federal investment funds to sustainable investments.

What the legislative initiatives mean for companies

The new laws show one thing above all: many companies that previously thought they were safe with regard to reporting obligations are now also covered – and with much stricter reporting requirements. Still taking the topic of ESG lightly will cause many problems in the future. It is advisable for every company to at least start taking small steps to act before their backs are against the wall due to the laws that have come in.

Do you want to find out if your company is ready for the EU taxonomy and the new reporting requirements? We will support you! Get in touch here.

Michael Diegelmann: Founder and General Manager
Michael Diegelmann has gained experience in over 150 communications projects (IPOs, investor relations, M&A, crisis) and has been working in the field of capital market communications since 1997. He is the author of 16 book publications relevant to the capital markets and was previously project manager at an international consulting firm and a Frankfurt brokerage house.

Justus Fischer: Senior Consultant
Justus Fischer has gained experience in various ESG and IR communications projects. He coordinated a cross-media content marketing campaign for an international technology group. Justus studied media studies, rhetoric and literature at the universities of Tübingen, Bielefeld and La Plata (Argentina).