European Commission publishes draft notice on the EU Taxonomy Regulation

On 29 November 2024, the European Commission published a draft notice, in the form of FAQs, on the interpretation and implementation of certain legal provisions of the Delegated Acts to the EU Taxonomy Regulation (the “Notice”).

The Notice – which has been sought after by stakeholders for quite some time – provides technical clarifications regarding the application of general taxonomy requirements and technical screening criteria (“TSC”) for specific activities included in the Taxonomy Climate and Environmental Delegated Acts. The Notice also addresses the ‘do no significant harm’ (“DNSH”) criteria, particularly in relation to pollution prevention and control, biodiversity and ecosystems, and climate change adaptation.

The Notice has been approved in principle by the European Commission and will be formally adopted in all the official languages of the EU as soon as the language versions are available.

The European Commission stated that its aim in publishing the Notice is to make the Taxonomy easier to use and is part of its wider agenda to simplify and reduce the reporting burden on companies. However, at 75 pages, it is a rather long clarification.

Key takeaways

Our key takeaways in respect of the more general Q&A from the Notice are as follows:

• European Sustainability Reporting Standard (“ESRS”) interoperability: compliance with the DNSH criteria in the Taxonomy Delegated Acts is a separate issue from the ESRS reporting requirements, which are intended to ensure transparency regarding undertakings’ sustainability impacts. While the ESRS provide for reporting methodologies, they do not set specific performance thresholds, unlike the Taxonomy. References to ESRS disclosures are therefore insufficient to demonstrate compliance with the DNSH criteria. However, the data used in ESRS reporting will often be useful for assessing compliance with the DNSH criteria.
• Economic activity Taxonomy-alignment: the assessment of Taxonomy-alignment of economic activities should be performed annually for the purposes of reporting.
• Reporting on activities not material for business: with respect to the Taxonomy Disclosures Delegated Act, undertakings subject to the EU Corporate Sustainability Reporting Directive (“CSRD”) must report the proportions of their turnover, CapEx and OpEx associated with Taxonomy-aligned economic activities without exemption. If, due to lack of data/evidence, such undertakings cannot establish whether Taxonomy-eligible activities that are not material for their business comply with the TSC, they should report those activities as not Taxonomy-aligned without any further assessment.
• Third-party verification frequency: the TSC prescribe a specific frequency of third-party verification for certain, but not all, activities. For those activities where third-party verification is prescribed without setting out a specific frequency, that verification should “take place on a regular basis, but not necessarily every year” and should “in any case take place whenever there are material changes to the information that is subject to verification”. Companies should also be aware to draw the distinction between the assurance required for Taxonomy disclosures in the context of the CSRD, which requires annual assurance, and those referred to above.
• Reporting for the first time: with respect to the Taxonomy Disclosures Delegated Act, undertakings that are required to report Taxonomy disclosures for the first time in a given reporting year do not need to include comparative information for the preceding financial year. They must only include comparative information in their subsequent reports.
• NACE codes: references to NACE codes should be understood as indicative and should not prevail over the specific definition of the activity provided in the descriptions.
• Climate risk and vulnerability assessment: with respect to Annex II to the Taxonomy Climate Delegated Act (Climate Change Adaptation), a climate risk and vulnerability assessment does not necessarily need to be prepared for all sites. Instead, a general analysis, which can be transposed to other sites, can be sufficient, provided that it addresses each site-specific risks and vulnerabilities.

In addition, we draw attention to the specific questions and answers relevant to each of the six Taxonomy objectives, which may be relevant to your business.

As exemplified by the above key takeaways, the Notice covers a wide range of matters in varying levels of detail. Such breadth and depth are indicative of the complexity of navigating the Taxonomy Regulation and the associated Delegated Acts. As ever, please do get in touch with us if you need help with such navigation.