The reporting of European industrial companies and financial institutions in accordance with the EU Taxonomy Regulation still largely lacks meaningfulness and comparability. This is one of the key findings of an analysis carried out by the auditing and consulting firm PwC Germany. PwC experts examined the EU taxonomy disclosures published in Europe up to and including April 30, 2023, and analyzed the reports of 706 industrial companies and 146 financial institutions for fiscal year 2022.
Industrial companies must report fully on taxonomy compliance for the first time
PwC wanted to know what the current situation is regarding taxonomy reporting in Europe. By way of background, the EU Taxonomy Regulation came into force on July 12, 2020. The taxonomy – a uniform classification system – is intended to provide clarity as to which economic activities are to be classified as sustainable. The taxonomy distinguishes between “taxonomy-eligible” and “taxonomy-compliant” activities. Taxonomy-eligible economic activities are those that can in principle be assigned to one or more predefined economic activities (“eligibility”). Taxonomy-compliant activities are those that also meet the associated criteria (Technical Evaluation and Minimum Protection Criteria) (“Alignment”).
Since the beginning of 2022, large, listed industrial companies with more than 500 employees have had to report on the proportion of their taxonomy-compliant economic activities in terms of sales, capital expenditures and operating expenses. From the beginning of 2023, they will have to fully report on the taxonomy compliance of their activities for the first time.
Financial institutions must also report the extent to which their asset and financing portfolios are taxonomy-compliant. But: their reporting is dependent on the reported data of the industrial companies in their portfolio. Therefore, they do not have to fully report on taxonomy compliance until 2024.
"The most important metrics on the EU taxonomy - the taxonomy KPIs - are calculated by financial firms based on data from their business partners, i.e., predominantly non-financial firms that they finance. As a result, the quality of financial institutions' reporting depends heavily on how well their business partners, i.e., industrial companies, report."
Industrial companies: Large Discrepancy Between Taxonomy Capability and Conformance
Among the core results for industrial companies: About half of the companies report the taxonomy disclosures in the sustainability report, a little more than a quarter in the annual report. 86 % disclose the key figures for each economic activity and only 66 % use the mandatory model tables for sales, capital expenditures and operating expenses (“templates”) issued by the EU Commission – although this is exactly what the EU taxonomy requires.
"This shows the extent of the challenges industrial companies continue to face in implementing EU taxonomy requirements."
Further research findings are: Discrepancies in the level of reported taxonomy capability and conformance are evident not only between, but also within industries. The average level of compliance corresponds to only a scant quarter of the taxonomy capability. Thus, there is a large discrepancy between the two figures. In concrete terms, this means that the average taxonomy-compliant turnover across all industries is 26%; however, companies report only 7% as taxonomy-compliant.
“Complexity will continue to increase.”
The results are similar for capital expenditures: On average in the industry, 37% are taxonomy-compliant, but only 10% are taxonomy-compliant. According to the companies surveyed, 27% of operating expenses are taxonomy-compliant, but only 8% are taxonomy-compliant.
"It may be that industrial companies are still unsure of the compliance criteria, the required data is not yet available within the company, or the criteria are simply not yet met for compliance. Companies should continue to look closely at the EU taxonomy, especially as reporting on additional environmental targets is forthcoming. The complexity will continue to increase."
Financial institutions: lack of transparency and uniformity
Half of the financial institutions publish the taxonomy disclosures in the annual report, while one third disclose them in a separate non-financial statement. What is striking here: The reported taxonomy-compliant key figures have a wide range. This suggests that different collection methods are used. In addition, the way in which financial institutions calculate their taxonomy indicators is usually not transparent: Some only publish the bare ratios, others explain them. However, many financial institutions criticize the taxonomy reporting or the quality of the data they receive from industrial companies for their own reporting.
"In the case of the banks, there is a double complexity: on the one hand, they themselves do not collect the data in a uniform manner, and on the other hand, they are heavily dependent on their portfolio companies - and their data quality is unfortunately not yet optimal. However, as of next year, templates developed by the EU Commission will also become mandatory for financial institutions. This will certainly lead to more standardization."
Clear criteria for ecologically sustainable economic activities
With the EU Taxonomy, the European Commission aims to promote the financing of sustainable economic activities and thus achieve the goals of the Paris Climate Agreement and the EU Green Deal. The regulation aims at a common framework for the assessment and reporting of sustainability aspects in companies. Among other things, this is intended to establish comparability and transparency. “In order to achieve the desired informative value and comparability of the data, both industrial companies and financial institutions still have some challenges to overcome,” agree Nadja Picard and Christoph Schellhas from PwC Germany.
"In the long term, however, taxonomy disclosures by industrial companies will most likely become an important metric for investors to determine the sustainability level of their portfolios."
Source: PwC-Study
Image: metamorworks via stock.adobe.com
