EU Taxonomy and how it could Effect Sustainability Reporting Forever

The Implication of the EU’s Taxonomy Regulations

By January of this coming year, companies are going to be required to disclose the climate change mitigation and adaptation environmental objectives of the European Union’s taxonomy regulations. Climate mitigation and adaptation will cover activities that substantially contribute to the stabilization of greenhouse gas concentrations in the atmosphere or activities that substantially reduce the risk of adverse impact on the current and expected future climate. By January of the next year, the remaining four environmental objectives will also be disclosed by companies. These objectives serve as criteria for specific economic activities and to recognize green, or ‘environmentally sustainable’, economic activities that make a substantial contribution to at least one of the EU’s climate and environmental objectives. By introducing mandatory disclosure obligations for companies and investors, the EU taxonomy regulations will serve as a useful transparency tool for socially responsible investors everywhere. It will also help companies in planning their climate transition and reliably raise the finances for this transition.

How Will Taxonomy Effect Sustainability Reporting?

There’s no way of knowing for certain exactly how the EU taxonomy will affect sustainability reporting, but we can make inferences based on the criteria and the data itself. Based on the criteria from the EU taxonomy, we know transparency will greatly increase in future sustainability reporting, but it may also mean the addition of something else socially responsible investors have been hoping for a while now – standardized reporting. While the EU taxonomy doesn’t cover all companies as of now, the companies it does cover will have a more standardized approach to how they actually report their activities, which will be much easier to interpret for investors and other companies in the future.

While companies haven’t had to officially disclose the first two objectives yet, some fintech companies have already begun to make EU taxonomy data estimations based on the data that is available. Even though they only serve as estimations, it has exposed the critical need for companies to report the sustainability of individual business segments as well as overall operations. This information doesn’t only help socially responsible investors expose greenwashing in a company, but also helps the company understand where its most unsustainable operations reside and what it can do to fix them. For example, a company could claim to be sustainable in its reporting due to its slight overall reduction of carbon emissions but may be emitting an exceedingly high portion of carbon emissions in one specific area which, if they decide to reduce emissions in that area, could lead to an even larger reduction in overall emissions.

Positive Outlook for the Future of Reporting

As the disclosure dates for the objectives begin rolling out, the hope is that companies will be more incentivized to transition towards carbon neutrality and a more sustainable economy. The EU taxonomy regulations and requirements don’t leave much room for greenwashing- a phenomenon where companies over exaggerate their sustainable contributions or underreport their more harmful activities. In order for a company to even be considered aligned with one of the EU taxonomy objectives, they have to prove that they cause no significant harm to the other objectives listed in the regulation. This will make reporting from companies more reliable for investors to use when making their socially responsible investment decisions, and hopefully, there will be less concern about greenwashing on their end as well.

Physis is a fintech company that offers investors a variety of sustainable data to track, manage, and understand the impacts of their investments. One feature includes our exclusion and watchlist option which allows you to view the controversial activities a company is participating in such as fossil fuels. Physis helps investors build sophisticated portfolios and prove their impact to meet the sustainability needs of any client.

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