First-time reporting on the EU taxonomy – focus on eligibility analysis

published on 12 December 2024 I reading time approx. 4 minutes

Tips for identifying taxonomy-eligible economic activities

The extension of the Corporate Sustainability Reporting Directive (CSRD) requires that in future, large non-capital-market-oriented companies report for the first time for the 2025 financial year in accordance with Article 8 (1) of the EU Taxonomy Regulation. In preparation for reporting and disclosing of the relevant key indicators, these companies must identify taxonomy-eligible economic activities within their business activities for turnover, capital expenditure (CapEx) and operating expenses (OpEx). This identification process poses an operational challenge for many companies, as it involves interpreting the scope for interpretation, correctly applying NACE codes and often taking complex group structures into account. This article highlights what aspects should be considered when identifying taxonomy-eligible activities.

Objective of the EU taxonomy

The overarching aim of the regulation is to reorient future capital flows towards “sustainable” investments. The EU taxonomy serves as a uniform and transparent classification system, that enables investors to compare companies in terms of their sustainability performance and to invest specifically in companies that operate ecologically.

As part of this, reporting companies must disclose how and to what extent the company's activities are linked to economic activities, that are classified as environmentally sustainable economic activities within the meaning of the Taxonomy Regulation. For that, companies must disclose the proportion of taxonomy-eligible and taxonomy-aligned economic activities in relation to the entirety of their activities.

Screening of the business activities

The first step of the reporting process within the framework of the EU taxonomy is the complete analysis of the company's own business activities regarding turnover, capital expenditures (CapEx) and operating expenses (OpEx).

In the survey of the status quo relevant information carriers must be included. For turnover, information from the income statement is usually the starting point for the analysis. For capex, the statement of changes in fixed assets or investment budgets are the starting point. In addition, relevant departments like controlling and sales should be included in this process step in order to collect robust information. This upstream consideration of a company's various business activities lays the foundation for a detailed analysis of taxonomy-eligible activities in the sense of the EU taxonomy.

Taxonomy eligibility analyses

Once a comprehensive identification of possibly relevant economic activities took place, these must be checked in detail for taxonomy eligibility and the eligible shares must be specifically determined. For this purpose turnover, CapEx and OpEx activities of the financial year are assigned to the economic activities of the six environmental objectives listed in the annexes to the delegated acts:

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.

But when is a business activity considered taxonomy-eligible?

An economic activity is taxonomy-eligible if it falls under the description of an activity described in an annex to the delegated acts and can therefore potentially substantially contribute to one of the six environmental objectives. If company-relevant economic activities are found within the annexes of the delegated acts, a final eligibility assessment must be carried out. This is carried out on the basis of a qualitative analysis of the description of the activity in the delegated act. To this purpose, the extent to which the definition of the activity in the regulatory framework corresponds to the actual situation within the company must be evaluated. In practice, regulatory classification can sometimes be difficult and may involve discretionary powers. Due to sometimes vague definitions and delimitations in the descriptions of economic activities, the EU Taxonomy offers room for interpretation for the preparer at these points. The interpretation should be coordinated with the responsible auditors as early as possible.

Assignment of taxonomy-eligible economic activities (click to enlarge)

Use of NACE-Codes

NACE is the European system for classifying goods and economic activities. The NACE codes are used in the annexes of the EU Taxonomy to provide guidance or guidelines for the classification of economic activities.

In addition to the qualitative description of the activity, reference is usually made for each activity to specific NACE codes that can be assigned to the listed economic activity. NACE codes therefore serve as a useful guide within the annexes of the EU Taxonomy. However, it is important to emphasize that the NACE codes are mainly indicative in the EU taxonomy. The NACE codes therefore serve as a tool for identifying and categorizing economic activities. Nevertheless, the assessment of the taxonomy eligibility of an activity should take into account the entire description of the activity in the annexes of the delegated act.

Conclusion

In order to prepare the disclosure according to the EU Taxonomy Regulation, a comprehensive understanding of turnover and investment activities is necessary. A complete picture of the economic activities relevant to the company forms the basis for the screening of potentially taxonomy-eligible economic activities. The final evaluation of taxonomy eligibility is based on the economic activities described qualitatively in the annexes to the delegated acts. NACE codes play a supporting role here by serving as an orientation aid.