As the global focus on sustainability intensifies, corporate social responsibility for companies and financial institutions has taken on new dimensions. Sustainability reporting, which involves disclosing environmental, social, and governance (ESG) performance to stakeholders, is now more crucial than ever. In 2024, significant updates to the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) will transform how sustainability reporting works.
This article offers a brief overview of these forthcoming changes, highlighting key timelines and detailing the latest changes in the EU Taxonomy and CSRD. Whether you’re a corporate entity, financial institution, or stakeholder, this guide will help you navigate the evolving requirements and prepare for the new reporting standards.
Current status and upcoming developments of the EU Taxonomy regulation in 2024
On 27 June 2023, the European Commission adopted the Taxonomy Environmental Delegated Act, which includes a new set of EU taxonomy criteria for economic activities that make a substantial contribution to one or more non-climate environmental objectives.
As a result, the EU Taxonomy will significantly expand its scope this year, with non-financial corporates required to report on alignment with all six environmental objectives, up from only the climate change mitigation and adaptation objectives in 2023.
Additionally, the Commission adopted amendments to the Taxonomy Disclosures Delegated Act and the Taxonomy Climate Delegated Act. These amendments cover the environmental objectives of climate change mitigation and adaptation. The criteria for these acts are largely informed by the Platform on Sustainable Finance recommendations, which were published in March and November 2022.
But it’s the Environmental Delegated Act that defines the technical screening criteria for the four new environmental objectives – also referred to as Taxo4 – of the EU Taxonomy regulation:
- 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
Furthermore, the Environmental Delegated Act includes 35 activities across 8 economic sectors:
- 6 activities on water and marine resources for 4 sectors;
- 21 activities on the transition to a circular economy for 5 sectors;
- 6 activities on pollution prevention and control for 2 sectors;
- 2 activities on biodiversity and ecosystems for 2 sectors.
The targeted amendments to the Climate Delegated Act define criteria for 12 new activities across 6 sectors contributing to climate change mitigation and adaptation, plus updates to existing activities.
In particular, the sectors and new activities included in the Climate Delegated Act and the Environmental Delegated Act are:
- Disaster Risk Management: Nature-based solutions, emergency services, flood risk prevention, and protection infrastructure;
- Buildings: Construction and renovations, demolition and wrecking, maintenance of roads and motorways, use of concrete in civil engineering;
- Manufacturing: Plastic packaging goods, electrical and electronic equipment, pharmaceuticals;
- ICT and Professional Activities: Software and consultancy, ICT/OT (Information and Operational Technologies) data-driven solutions;
- Services: Sale of spare parts and repair services, preparation for re-use and end-of-life products, Components, materials, and products traded for goods for reuse;
- Transport: New transitional water and air transport, automation, and rail components;
- Water Supply and Sewerage: Water supply, urban wastewater, sustainable drainage systems (SUDS), phosphorus recovery.
CSRD: Update on reporting with integration of the European Sustainability Reporting Standards (ESRS)
Noteworthy updates were made to the Corporate Sustainability Reporting Directive (CSRD), which starts applying in the 2024 financial year, with the first reports due in 2025. This applies to the first cohort of large EU-listed companies, public interest entities, groups, and certain large non-EU issuers and groups, subject to certain conditions and potential exemptions.
The European Commission was initially required to adopt sector-specific European Sustainability Reporting Standards (ESRS) and standards for certain non-EU entities by 30 June 2024. However, in October 2023, the Commission proposed postponing these adoptions to 30 June 2026.
It was then on 7 February 2024, that the European Parliament and Council agreed with this postponement. They requested the Commission to publish standards in eight key areas as they become ready and mandated regular consultations with the European Financial Reporting Advisory Group (EFRAG) to monitor progress and prioritization. This postponement aims to allow entities to focus on implementing the initial sector-agnostic ESRS and better allocate resources towards developing sector-specific standards.
Green Asset Ratio (GAR): a new key sustainability metric for banks
Starting 1 January 2024, financial institutions are required to report their Green Asset Ratio (GAR) under the EU Taxonomy Regulation. The GAR is a key metric that measures the proportion of a bank’s environmentally sustainable assets, as defined by the EU Taxonomy. This requirement aims to enhance transparency and provide insights into how financial institutions contribute to the green transition.
The GAR will help stakeholders understand the extent to which banks are financing sustainable activities and will play a crucial role in the broader context of sustainability reporting and compliance with the CSRD. Financial institutions will need to ensure they have the necessary systems and processes in place to accurately calculate and report their GAR, in line with the detailed criteria set out by the EU Taxonomy Regulation.
EU Taxonomy and CSRD Implementation Timeline
Date | Event | Description |
1 Jan 2024 | Start of application of sector-agnostic ESRS and Green Asset Ratio (GAR) | The first set of ESRS becomes applicable in all Member States. Financial institutions must also start reporting their Green Asset Ratio under the EU Taxonomy Regulation. |
2024 | Start of CSRD reporting for large EU companies | Large EU companies begin preparing reports under new CSRD standards. |
2025 | First submission of CSRD reports | Reports for the financial year 2024 are due. |
1 Jan 2026 | Application of ESRS for listed and non-listed SMEs | Proportional reporting standards for SMEs, with an additional two-year opt-out option for non-listed SMEs. |
30 Jun 2026 | The new deadline for adopting sector-specific ESRS | The adoption deadline was postponed to allow focus on implementing the initial sector-agnostic standards and to develop sector-specific sustainability standards. |
2026 | Implementation of sector-specific standards and SME guidance | Sector-specific standards and guidance for SMEs begin to apply. |
2028/2029 | Application of ESRS for non-EU entities | Non-EU entities meeting specific thresholds start following ESRS under CSRD. |
Sustainability Reporting: The Burden of Increased Bureaucracy and the Help of AI
With so many changes in sustainability reporting, it’s challenging to keep up and stay current with everything. Compliance with the EU Taxonomy and CSRD involves substantial bureaucratic costs, requiring significant resources in personnel, technology, and time. Smaller companies, in particular, may find these demands burdensome. The extensive legislative documents, totaling over 30,000 pages, add to the challenge by necessitating exhaustive data collection and evaluation from various sources.
To streamline compliance, AI-powered solutions like the TAXO TOOL we built at Dydon AI offer an efficient and cost-effective approach. Leveraging advanced AI and machine learning algorithms, TAXO TOOL simplifies the compliance process by automating data collection and analysis. This tool boasts a robust knowledge base with comprehensive data on CO2 emissions and procedural models, ensuring accurate assessments of sustainability based on EU Taxonomy criteria.
Our open-box approach promotes transparency, enabling companies to confidently demonstrate their compliance to regulators, investors, and stakeholders – aiming for industry collaboration, reducing the financial burden of compliance, and promoting a collective approach towards sustainability.
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