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EU Taxonomy Barometer 2023: Despite Challenges, Vast Majority of Companies Complying

BUSINESSEU Taxonomy Barometer 2023: Despite Challenges, Vast Majority of Companies Complying

“The EU Taxonomy Barometer 2023,” compiled by EY for the second time, reveals that the Taxonomy is a challenge for companies seeking to implement EU regulations. However, the vast majority (96%) of surveyed non-financial enterprises have published information on this topic in their annual report or a separate statement.

The European Union (EU) aims to achieve emission neutrality. Therefore, together with the adopted directives on combating climate change, the EU introduced the Taxonomy in 2020. This is a set of standards allowing investors to understand what is and what is not considered a “green” economic activity. It includes six main environmental objectives: mitigating climate change, adapting to it, sustainable utilization and protection of water and marine resources, transitioning to a circular economy, preventing pollution and controlling it, and protecting and restoring biodiversity and ecosystems.

Enterprises covered by the requirement to publish non-financial information in reports must disclose what proportion of their activities qualify for the Taxonomy and are in line with it. Non-financial enterprises should report the proportion of operations compliant with the Taxonomy in total turnover, capital expenditures/investments (CapEx), and operational expenditures (OpEx). Financial sector companies must disclose the extent to which they finance activities that qualify for and comply with the Taxonomy.

“Companies obliged to report according to the requirements of the EU Taxonomy must remember that reporting disclosures related to the Taxonomy will become a standard element of annual reporting from now on, and the scope of activities and technical qualification criteria may undergo updates. This means tracking reporting requirements and conducting periodic assessment of qualification and compliance with the Taxonomy is required. We also carry out analyses of EU Taxonomy reporting practices from the perspective of the Polish market and will publish their results in the future,” says Rafał Hummel, Partner at EY Poland, leader of the ESG strategy and reporting group.

Most of the non-financial enterprises surveyed by EY have published information about the Taxonomy. Among them, 89% disclosed at least one of the three key performance indicators (KPIs); turnover, CapEx, and OpEx.

**Share of Turnover in the Taxonomy**
Poland is in the group of countries with the lowest percentage of turnover qualifying for the Taxonomy. Polish companies reported only 10% of such activities. The main reasons for such a low share were consumer product sector companies and mining companies.

More than one third of the companies analyzed by EY reported no qualifying turnover, which indicates that they are engaged in activities that do not contribute to mitigating climate change (CCM) or adaptive goals (CCA) at all. These are the two main strategies for managing climate change risks.

**Capital expenditures / Investment expenditures**
The average CapEx eligibility was 36%, which is the highest of all three KPIs. This is because, in addition to investment related to qualifying turnover, companies can also report investments in the purchase of production from qualifying and adapted economic activities. CapEx also includes expenses for actions reducing greenhouse gas emissions. Slovakia showed the lowest eligibility. Poland, with 29% of eligible expenditures, was near the end of the countries surveyed by EY. As for expenditures adjusted to the Taxonomy, amounting to only 10%, Poland ranks fourth from the end.

**Operating Expenditures**
The percentage of OpEx eligibility and adjustment is similar to the percentage of turnover, with an eligibility indicator of 28% and about 12% adjustment. The average OpEx eligibility is lower than CapEx. Austria had the highest average eligibility. Again, Poland was at the end of the countries surveyed, with 23% of expenditures qualifying for the Taxonomy and only 8% adjusted to it.

Difficulties in reporting in accordance with the Taxonomy result not only from the need to show the proportion of activities adjusted to the Taxonomy, but primarily from problems with interpreting some criteria and collecting technical and detailed information needed to assess adjustment. That’s why the EU published answers to frequently asked questions last December. Nonetheless, challenges in interpreting some aspects of the Taxonomy Regulation remain.

According to Aleksandra Stanek-Kowalczyk, Partner at EY Poland and Sustainable Development Expert, “the introduction of the requirement to report in accordance with the Taxonomy has shown that some companies in Europe are not prepared to disclose the required information. The direct linking of financial data and ESG data is new for companies and makes it difficult not only to calculate indicators, but also to collect data and determine responsibility for these disclosures.”

From the beginning of next year, companies will be obliged to report Taxonomy eligibility for additional activities, within all six goals. Also, the directive on corporate reporting in the area of sustainable development (CSRD), approved in November 2022, requires companies subject to it to disclose the Taxonomy in reports on sustainable development.

“There is no doubt that further guidelines are needed to ensure a consistent reporting approach across all sectors of the economy. Companies also need to know how and to what extent the Taxonomy will impact them. Therefore, continuous cooperation between companies and EU and national regulators, as well as representatives of the financial sector, is necessary,” believes Aleksandra Stanek-Kowalczyk.

**About the study**
The goal of the next edition of the “EU Taxonomy Barometer 2023” is to show the progress of companies in the second reporting year of mandatory Taxonomy disclosure.

EY analyzed 320 European companies listed on major stock exchanges and generating about 92% of the EU’s GDP, operating in 17 EU countries. Both mandatory and voluntary quantitative and qualitative information were analyzed. 16 stock market indices were considered, including the WIG30 GPW in Warsaw. The companies surveyed were from the construction, infrastructure and real estate, finance, fuel and gas, consumer products, production, energy and utilities, mining, technology, media and telecommunications, health care, biotechnology and chemistry, and mobility (vehicle production and transportation) sectors.

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