Mastering EU Taxonomy Reporting: A Step-by-Step Guide to Compliance and Beyond

Sustainability has emerged as a key concern for businesses everywhere. To foster sustainable investments and address greenwashing, the EU has implemented the Taxonomy Regulation, which establishes a standardized framework for classifying environmentally sustainable activities. This regulation is essential to the EU’s objective of achieving a climate-neutral economy by 2050. For companies, aligning with the EU Taxonomy is not just about meeting regulations; it’s a strategic approach to boost transparency and attract investors who are focused on sustainability.

This detailed guide offers a step-by-step method for creating an EU Taxonomy report, ensuring that your organization complies with requirements while effectively showcasing its sustainability initiatives.

Understanding the EU Taxonomy

The EU Taxonomy is a framework that sets out criteria to identify whether an economic activity is environmentally sustainable. It provides a common language for businesses and investors, aiming to:

• Channel capital into sustainable investments.
• Reduce market fragmentation by clarifying what sustainable activities are.
• Increase transparency and combat greenwashing.

To qualify as environmentally sustainable under the EU Taxonomy, an economic activity must meet the following four conditions:

1. Substantial Contribution: The activity must significantly contribute to at least one of the six environmental objectives:

   • Climate change mitigation
   • Climate change adaptation
   • 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

2. Do No Significant Harm (DNSH): The activity must not significantly harm any of the other environmental objectives.

3. Minimum Safeguards: The activity must meet basic social and governance standards, ensuring compliance with international labor norms and human rights principles.

4. Technical Screening Criteria (TSC): The activity must meet specific performance thresholds outlined in the TSC for each environmental objective.

Steps for creating an EU taxonomy report:

Step 1: Identify and Classify Economic Activities

The first step in creating an EU Taxonomy report is to identify and classify your company’s economic activities. This includes:

• Mapping Business Operations: Take a close look at your entire range of products and services to figure out which activities fall under the EU Taxonomy. You can use tools like the EU Taxonomy Compass to align your activities with the relevant NACE codes and technical screening criteria.
• Assessing Eligibility: Evaluate which of your economic activities meet the EU Taxonomy requirements by examining their potential to support environmental goals. This evaluation should focus on the nature of the activity and how well it matches the established criteria.

Example: A manufacturing company that produces energy-efficient appliances would pinpoint its production processes and check if they meet the EU Taxonomy standards for climate change mitigation.

Step 2: Evaluate Substantial Contribution

Once you identify eligible activities, assess whether they significantly contribute to one or more environmental goals:

• Review Technical Screening Criteria: For each eligible activity, refer to the TSC to grasp the specific requirements for substantial contribution. These criteria outline the performance thresholds and conditions that the activity must fulfill.
• Document Compliance: Collect evidence and documentation that shows how each activity aligns with the substantial contribution criteria. This could include certifications, performance data, and evaluations from third parties.

Example: The same manufacturing company must show that its energy-efficient appliances meet or surpass the energy performance standards specified in the TSC for climate change mitigation.

Step 3: Ensure Do No Significant Harm (DNSH)

To confirm that the activities do not significantly harm other environmental objectives, follow these steps:

• Evaluate DNSH Criteria: For each activity, assess any potential negative effects on the other five environmental objectives. The DNSH criteria, as detailed in the TSC, should be thoroughly examined.
• Implement Mitigation Measures: If any potential harms are found, take appropriate steps to mitigate and reduce these impacts.
• Document Findings: Keep a record of the assessment process and results, including any mitigation strategies that were put in place.

Example: The manufacturing company must ensure that the production of energy-efficient appliances does not result in significant pollution or adversely affect biodiversity. This may involve using cleaner production technologies and effective waste management practices.

Step 4: Verify Compliance with Minimum Safeguards

It is important to comply with minimum social and governance safeguards:

• Adopt International Standards: Ensure that your company follows international guidelines like the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
• Implement Internal Policies: Develop and enforce internal policies that support ethical business practices, labor rights, and human rights.
• Conduct Due Diligence: Regularly review and monitor your operations and supply chains to ensure compliance with these safeguards.

Example: The manufacturing company should have strong policies against child labor, provide fair wages, and ensure safe working conditions throughout its operations and supply chain.

Step 5: Calculate Key Performance Indicators (KPIs)

The EU Taxonomy mandates that companies disclose specific key performance indicators (KPIs) to measure the extent of their environmentally sustainable activities:

• Turnover KPI: This involves calculating the percentage of net turnover that comes from activities aligned with the Taxonomy.
• Capital Expenditure (CapEx) KPI: Here, companies need to identify the portion of CapEx that is associated with assets or processes that meet Taxonomy criteria.
• Operating Expenditure (OpEx) KPI: This KPI assesses the share of OpEx that is related to the upkeep and operation of assets connected to Taxonomy-aligned activities.

Example: If the manufacturing company generates €50 million from energy-efficient appliances out of a total turnover of €200 million, the Turnover KPI would be 25%.

Step 6: Prepare the EU Taxonomy Report

With all assessments and calculations completed, compile the EU Taxonomy report:

• Use Prescribed Templates: Make sure to utilize the templates provided by the European Commission in Annex II of the Disclosures Delegated Act. Your report should conform to these specified formats.
• Provide Detailed Disclosures: It’s important to include thorough information regarding the methodology employed, the sources of data, the assumptions made, and any challenges faced during the assessment process.
• Ensure Transparency: Clearly explain how each activity fulfills the substantial contribution and Do No Significant Harm (DNSH) criteria, as well as how minimum safeguards are maintained.
• Include Comparative Data: When relevant, present data from previous reporting periods to demonstrate progress over time.

Example: The report for the manufacturing company would outline the assessment process for its energy-efficient appliances, detailing compliance with Technical Screening Criteria (TSC), evaluations of DNSH, adherence to minimum safeguards, and the calculated Key Performance Indicators (KPIs).

Step 7: Obtain External Assurance

To enhance the credibility of your EU Taxonomy report:

• Engage Independent Auditors: Think about having external experts audit the report to confirm the accuracy and completeness of the information presented.
• Address Feedback: Be ready to make necessary changes based on the auditor’s feedback to ensure compliance and enhance the quality of the reporting.

Example: The manufacturing company could hire a sustainability consultancy to evaluate its EU Taxonomy report and offer assurance on the reported KPIs and compliance processes.

Step 8: Continuous Monitoring and Improvement

EU Taxonomy reporting is not just a one-time task; it requires ongoing dedication:

• Stay Informed: Regularly update yourself on changes to the EU Taxonomy Regulation and associated guidelines to maintain compliance. The framework is dynamic, and new sectors and activities may be introduced over time.
• Enhance Data Collection: Invest in systems and processes that boost the accuracy and efficiency of gathering sustainability metrics. This will make future reporting smoother.
• Integrate Reporting into Business Strategy: Ensure that sustainability reporting is aligned with your corporate strategy, embedding Taxonomy-aligned activities into your decision-making processes.
• Benchmark Performance: Evaluate your KPIs and disclosures against those of industry peers and best practices to pinpoint areas for enhancement.
• Stakeholder Engagement: Keep investors, regulators, and other key stakeholders informed about your progress to build trust and showcase your commitment to sustainable business practices.

Example: The manufacturing company should consistently monitor advancements in energy efficiency, emissions reductions, and supply chain sustainability to enhance its EU Taxonomy reporting and bolster its ESG credentials.

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Common Challenges in EU Taxonomy Reporting (And How to Overcome Them)

While the EU Taxonomy framework provides clear guidelines, many companies face challenges during the reporting process. Here are some common challenges and how to address them:

1. Complexity of Classification

• Challenge: Identifying eligible activities and mapping them to the EU Taxonomy can be challenging, especially for companies with diverse business operations.
• Solution: Leverage the EU Taxonomy Compass and consult sustainability experts to ensure accurate classification.

2. Data Collection Difficulties

• Challenge: Gathering data for substantial contribution, DNSH criteria, and KPIs can be time-consuming and resource-intensive.
• Solution: Implement digital tools and sustainability reporting software to streamline data collection and verification.

3. Evolving Regulatory Requirements

• Challenge: The EU Taxonomy is an evolving framework, with ongoing updates and additional sector inclusions.
• Solution: Maintain a proactive approach by staying updated on regulatory changes and participating in industry discussions.

4. Ensuring Consistency Across Reports

• Challenge: Aligning EU Taxonomy reporting with other ESG frameworks such as CSRD, SFDR, and TCFD can be complex.
• Solution: Develop an integrated sustainability reporting approach to ensure coherence across multiple regulatory disclosures.

5. Securing Internal Buy-in

• Challenge: Achieving internal alignment and securing resources for EU Taxonomy compliance can be difficult.
• Solution: Educate stakeholders on the strategic benefits of Taxonomy alignment, including access to sustainable financing and enhanced corporate reputation.

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The Future of EU Taxonomy Reporting

As sustainability regulations continue to evolve, companies should anticipate new developments in EU Taxonomy reporting:

• Expansion to More Sectors: The framework will likely expand to cover more economic activities, requiring additional industries to comply.
• Integration with Global Standards: Efforts are underway to harmonize EU Taxonomy with international sustainability reporting frameworks, enhancing global comparability.
• Digitalization of Reporting: Automation and AI-powered tools will play a key role in streamlining Taxonomy data collection and reporting processes.
• Greater Investor Scrutiny: Investors are increasingly using EU Taxonomy reports to assess sustainability risks, making transparency and accuracy more critical than ever.

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Final Thoughts

Creating an EU Taxonomy report involves several steps, including careful assessment, data gathering, and compliance checks. Although the process can be intricate, adhering to a structured method guarantees accuracy and transparency in sustainability disclosures.

Incorporating EU Taxonomy compliance into a company’s strategy can lead to long-term benefits, boost investor trust, and support a more sustainable economy. As regulatory scrutiny intensifies, organizations that take the initiative to implement best practices in EU Taxonomy reporting will be in a stronger position moving forward.

If your organization is beginning its EU Taxonomy journey, now is the ideal time to invest in solid sustainability reporting frameworks, utilize digital tools, and foster a culture of transparency.

Are you looking for help in optimizing your EU Taxonomy reporting process? Consider exploring sustainability reporting platforms like Lythouse to ensure complete compliance and enhance your sustainability efforts.

How Lythouse Simplifies EU Taxonomy Reporting

At Lythouse, we understand that EU Taxonomy reporting is more than a compliance requirement; it’s a chance to drive significant sustainability actions and enhance transparency. Yet, the challenges of classification, data collection, and regulatory alignment often make it difficult for companies to efficiently meet their reporting obligations.

How Lythouse Supports Your EU Taxonomy Reporting Journey

1. Automated Activity Classification

Manually mapping business activities to the EU Taxonomy can be time-consuming and prone to errors.

Lythouse automates this process by:

• Identifying Taxonomy-eligible activities using AI-powered classification.
• Mapping economic activities to the correct NACE codes and Technical Screening Criteria (TSC).
• Providing pre-configured templates that simplify substantial contribution and DNSH assessments.

2. Seamless Data Collection & Integration

Siloed sustainability data is one of the biggest challenges in reporting.

Lythouse integrates with existing enterprise systems to:

• Automatically pull turnover, CapEx, and OpEx data for KPI calculations.
• Streamline carbon emissions tracking and ensure DNSH compliance.
• Maintain a single source of truth for sustainability metrics.

3. Built-in Regulatory Compliance

Keeping up with evolving EU Taxonomy regulations is a challenge for most companies.

Lythouse ensures regulatory compliance by:

• Continuously updating reporting templates in line with the latest EU Taxonomy and CSRD requirements.
• Offering built-in validation checks to prevent misreporting.
• Providing real-time audit trails for transparency and investor confidence.

4. AI-Powered Insights for Decision-Making

EU Taxonomy compliance should not just be about reporting—it should also inform strategic decision-making.

Lythouse goes beyond reporting by:

• Offering predictive analytics to assess future Taxonomy alignment.
• Identifying opportunities for sustainable investments within your business.
• Benchmarking your company’s Taxonomy KPIs against industry peers.

5. Effortless Report Generation

Lythouse eliminates the manual effort of compiling reports by:

• Generating EU Taxonomy reports in a few clicks, formatted according to regulatory disclosure requirements.
• Enabling customized dashboards for sustainability teams, CFOs, and investors.
• Providing export-ready reports for CSRD and SFDR compliance.

Future-Proof Your EU Taxonomy Compliance with Lythouse

EU Taxonomy reporting will only grow in complexity, but Lythouse makes it effortless. Whether you’re just starting out or looking to refine your reporting strategy, our AI-powered ESG platform helps you streamline compliance, enhance transparency, and unlock deeper sustainability insights.

Ready to simplify your EU Taxonomy reporting? Schedule a Demo with Lythouse today and transform compliance into a competitive advantage.