EU Taxonomy Reporting: The Leaders and the Laggards

Regulatory Compliance October 19, 2022 Oscar Gomez Fontana, Luis Angolotti, Patricia Pina

On January 1st, 2022, the EU Taxonomy entered into force, requiring companies under the Non-Financial Reporting Directive (NFRD) to disclose, over the course of 2022, the percentage of their activities that are eligible for the EU Taxonomy under the objectives of Climate Change Mitigation or Climate Change Adaptation. The regulation envisions four more environmental objectives (water, circular economy, pollution prevention, and biodiversity), but their associated regulatory text has not yet been passed into law.

A company’s activity qualifies as eligible when the associated revenue, capital expenditures (CapEx), or operating expenses (OpEx) fit the description of one of the activities defined in the EU Taxonomy regulation

We should emphasize that eligibility is different from alignment. Eligibility shows whether an activity in question can be considered for alignment, while alignment itself means that the activity is contributing to an environmental objective while also 1) not harming other environmental objectives and 2) maintaining minimum social safeguards.

The EU Taxonomy regulation is being rolled out in phases, with the first, current phase requiring companies only to report eligibility. Non-financial companies subject to NFRD will have to report alignment figures during 2023, while financial institutions will have to report their entity-level alignment during 2024.

At Clarity AI, we have looked at the 1,400 largest NFRD companies (covering 97% of the market capitalization of listed NFRD companies) to learn how they comply with the EU Taxonomy regulation.

The majority of companies (950) have reported EU Taxonomy eligibility. The larger the company, the more likely it is to disclose EU Taxonomy figures. Of companies reporting eligibility, all of them are reporting the eligibility of their turnover and most are also reporting the eligibility of their CapEx and their OpEx (85% and 82%, respectively).

Unfortunately, only 38% of the companies are reporting alignment figures. This is expected, given that alignment disclosures are not yet required by the regulation. Of the companies that do report alignment, only 10% are reporting an alignment above 0%.

By geography, we found that companies in Finland have the highest propensity to report their EU Taxonomy figures. On the other side of the spectrum, companies based in Ireland, many of which actually carry out the bulk of their activities in the US, are less likely to report their EU Taxonomy figures. In particular, American companies headquartered in Ireland account for 25% of the market capitalization of all listed NFRD companies that are not reporting. This group includes some well-known companies that moved their jurisdiction to Ireland to benefit from favorable tax conditions.

*These 11 countries represent 95% of the total market of listed NFRD companies

By sector, we found that Utilities and Consumer Discretionary were more likely to report (93% and 94%, respectively), while companies in the Health Care and IT sector were the least likely to report (67% and 70%, respectively).

For the first time, companies are reporting information that investors can use to understand the proportion of their investments that can potentially contribute to an EU Taxonomy objective. A number of NFRD companies are not yet reporting such information, but will have until December 31st to do so if they want to remain compliant with the regulation. Once that data becomes available, Clarity AI will offer it to investors wherever and however they want to consume it. Contact us to see Clarity AI’s data in action, and let us create a custom demo for your organization.

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