Many companies have to report in accordance with both regulations, but this does not mean a duplication of effort. The EU Commission's EU Green Deal aims to modernize the EU economy and transform it into a climate-neutral, sustainable economy. EU Taxonomy and CSRD/ESRS are key standards that will enable this transition. Here's how:
1️⃣ EU taxonomy
The EU taxonomy aims to redirect private capital into sustainable assets. Banks must report how many assets are sustainably invested. It defines what a sustainable investment is and classifies relevant sectors based on six environmental and social protection criteria. Investments that meet these criteria can be flagged as "green."
2️⃣EU-Taxonomy-Criteria in CSRD/ESRS
CSRD/ESRS is the designated reporting regulation in the EU and covers all relevant environmental, social and governance disclosure requirements. Fortunately, CSRD/ESRS integrates the EU taxonomy criteria into the reporting standard, so companies have synergies in reporting and consistency in frameworks.
3️⃣ Two main objectives: Climate mitigation and climate adaptation
Both climate mitigation and climate adaptation as main objectives are underpinned by measurable criteria in the EU taxonomy, e.g. CO2 criteria for green steel or solar investments. Both aspects are also included in the CSRD/ESRS with CO2 reduction measures and indicators for mitigation and climate risks relevant for adaptation.
4️⃣ Do no significant harm: Four other environmental targets
Next, under the EU taxonomy, investments must ensure that they do no harm in four other environmental target areas: Water and Marine Resources, Pollution, Ecosystems and Biodiversity, Resource Use, and Circular Economy. Consistently, these four areas are also included in the CSRD/ESRS with specific disclosure requirements for reporting, e.g. water use, resource use or pollution indicators.
5️⃣ Social Safeguards: Ensure social standards and human rights
Finally, human rights and international minimum social standards, e.g. from the International Labor Organization or OECD - OCDE guidelines must be ensured in investments to comply with EU taxonomy. These are called "social protection criteria." CSRD/ESRS has consistent reporting requirements on social standards for its own workforce and the workforce in the value chain.
Medium-sized companies often do not rank first in the EU taxonomy; these are financial institutions and large listed companies. However, reporting requirements for EU taxonomy and CSRD/ESRS are bypassed by investors/banks and supply chain. Therefore, it is important that medium-sized companies establish pragmatic and synergetic reporting that takes both instruments into account.
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