Boards of directors have most likely heard about the EU Taxonomy, but not all are sure what their role in this area should be. The purpose of this article is to help give an understanding of what actions boards might take to ensure companies are prepared.
The EU Taxonomy is part of the broader EU Action Plan on Sustainable Finance, the aim of which is to help investors and large companies evaluate and improve the sustainability of their business operations. The EU Taxonomy Regulation is a classification system developed by the EU to provide a standardized framework and establish a common language and criteria for determining whether an economic activity is environmentally sustainable. Its purpose is to promote sustainable economic activities, guide investments towards environmentally friendly projects, and facilitate the transition to a low-carbon and sustainable future within the European Union. To meet the regulations, companies are required to disclose information on how their activities align with the taxonomy.
The regulation sets out six environmental objectives that an economic activity must substantially contribute to in order to be considered environmentally sustainable. These objectives include climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
In addition to the environmental objectives, the taxonomy also provides technical screening criteria that define the specific thresholds and performance criteria that economic activities must meet to be considered sustainable. These criteria are continuously reviewed and updated by a dedicated expert group.
To help companies meet the EU Taxonomy Regulations, boards of directors should consider the following aspects:
1. Familiarity with the EU Taxonomy:
The board should have a comprehensive understanding of the EU Taxonomy Regulation, including its objectives, scope, and requirements. They should stay informed about updates and any relevant guidelines or interpretations provided by regulatory authorities.
2. Assessment of Business Activities
The board needs to assess the company’s business activities and determine their alignment with the EU Taxonomy. This involves understanding the economic activities covered by the taxonomy and evaluating whether the company’s products, services, or investments qualify as environmentally sustainable activities under the defined criteria.
3. Disclosure Requirements:
The EU Taxonomy requires companies to disclose their alignment with the taxonomy’s criteria. Boards should ensure that the company has appropriate systems and processes in place to gather the necessary data, measure performance, and disclose relevant information accurately and transparently.
4. Data Collection and Management:
To demonstrate compliance with the taxonomy, boards should oversee the collection and management of environmental data within the organization. This includes identifying relevant metrics, establishing data collection processes, and ensuring data accuracy and integrity.
5. Internal Controls and Governance:
Boards should review and strengthen internal controls and governance mechanisms to ensure the accuracy, reliability, and consistency of sustainability-related information. This may involve establishing clear responsibilities, segregation of duties, and verification procedures to support the reliability of data disclosed.
6. Integration into Business Strategy:
The board should consider how the EU Taxonomy aligns with the company’s overall business strategy. This may involve evaluating investment decisions, product development, and resource allocation to support the transition to more sustainable activities and meet the taxonomy’s requirements.
7. Risk Management:
Boards should assess the potential risks and opportunities associated with the EU Taxonomy. This includes considering the impact on market positioning, reputational risk, regulatory compliance, and potential shifts in consumer preferences or investor expectations.
8. Stakeholder Engagement:
Engaging with relevant stakeholders, such as investors, customers, and employees, is crucial for understanding their expectations, concerns, and perspectives on sustainability. Boards should consider incorporating stakeholder feedback into their decision-making processes and disclosure practices.
9. Training and Expertise:
Directors and senior management should acquire the necessary knowledge and expertise regarding the EU Taxonomy and sustainable finance. This may involve training programs, hiring sustainability experts, or seeking external advice to ensure informed decision-making.
10. Continuous Monitoring and Adaptation:
Compliance with the EU Taxonomy is an ongoing process. Boards should establish mechanisms for monitoring changes in regulations, evolving best practices, and industry standards related to sustainability. Regular review and adaptation of strategies and processes will be necessary to maintain alignment with the taxonomy.
It is important to note that while this is general guidance, each organization’s specific circumstances and industry context may require additional considerations when preparing for the EU Taxonomy. It is advisable to consult legal and sustainability professionals for tailored advice.
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