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Introduction to EU Taxonomy Management

The last decade has witnessed the rising importance of sustainability, Increasing regulatory obligations to meet the EU’s climate targets and build better resilience against climate risks, have made it important for companies to reassess their business activities and channel investments towards sustainable projects. However, with the lack of clear definitions and criteria to evaluate their operations, companies find it challenging to re-align their strategies and create long-term value for their stakeholders. To achieve this, the EU Sustainable Finance Taxonomy (hereinafter: EU Taxonomy) was established. It is a classification system aimed at investors, companies, financial institutions, and policymakers, helping them establish if and how an activity can be considered environmentally sustainable.

Following the Paris Agreement in 2015, the European Commission unveiled the European Green Deal in December 2019 as part of its climate policy posture. The European Commission's goal with the Green Deal is to achieve Net Zero emissions by 2050 thus becoming climate neutral. The EU Taxonomy, therefore, is intended to facilitate allocation of capital towards sustainable activities and projects to support the Green Deal's goals and navigate the transition to a low-carbon economy. Undoubtedly, the EU Taxonomy is a landmark regulation that will initiate a paradigm shift in how businesses operate.

The EU Taxonomy establishes an EU-wide list of economic activities which meet the EU’s environmental requirements across a broad range of industry sectors (based on NACE Classification). Currently it encompasses 101 taxonomy economic activities distributed in 13 sectors, as published in the Official Journal on 9 December 2021. EU Taxonomy assessment is becoming an important consideration for every company with the goal to optimize profitability and their environmental performance at the same time. Assessment of EU Taxonomy alignment of turnover, capital expenditure and operational expenditure for an eligible economic activity is based on the EU Taxonomy Article 8 Delegated Act. For an activity to be aligned along EU Taxonomy, it must substantially contribute to at least 1 of the 6 environmental objectives and do no significant harm to the other 5 environmental objectives. At the same time, it should also meet the minimum safeguard requirements (as presented in the image below).

Our Approach and Solution

The EU Taxonomy Management, on SAP Profitability and Performance Management, provides an end-to-end process and calculation model for companies to evaluate the eligibility and alignment of their operations along the Taxonomy Regulation. In SAP PaPM 3.0 SP18, released on June 21st, 2022, assessment criteria for 7 out of 13 sectors have been incorporated. Within these 7 sectors, 26 economic activities, as defined under the Taxonomy Regulation, are covered. Based on pre-installed technical screening criteria as specified in the EU Taxonomy Regulation, the content evaluates economic activities for their substantial contribution to two of the six environmental objectives namely, contributing to climate change mitigation and contributing to climate change adaptation, while also checking the activities against the do-no-significant-harm criteria and minimum safeguard requirements.The content also provides business users with the option to prepare their emissions data and integrate with the Taxonomy results. Our approach and solution can be seen in the figure below.

The model, therefore, allows business users to check the eligibility and subsequently, the percentage alignment of the CapEx, OpEx and Turnover of their economic activity, along Taxonomy Regulation. With this, they can identify risks early-on, plan towards a green transition and carve out competitive advantages.

The European Commission has issued a timeline for disclosures implementation as 1st January 2023, for the reporting period of 2022, for non-financial undertakings, and as 1st January 2024 for reporting period 2023 to financial undertakings. Therefore, this content is of significance to all eligible companies and institutions as it will be expanded to cover all 13 sectors and 101 economic activities by PaPM 3.0 SP20, in December 2022, as well as provide continuous enhancements in the future aligned with the updates on Taxonomy Regulation (including technical screening criteria for the other four environmental objectives).

Benefits for Customers

Our solution, EU Taxonomy Management, assists clients navigate smoothly through the complexities of the Taxonomy Regulation with pre-defined screening criteria and easy data integration from SAP ERP. Additionally, it creates opportunities to be a market differentiator and building long-term trust with shareholders. The content for EU Taxonomy is implemented with the following value creation in mind:

  • Assess EU Taxonomy eligibility and alignment of CapEx, OpEx and Turnover at activity and company level along the EU Taxonomy screening criteria and meet up-to-date regulatory obligations

  • Use flexible modeling, pre-built calculation logic and sophisticated granular reports to gain deeper insights

  • Calculate product carbon footprint, aligned with the GHG Protocol, and use as an input in technical screening

  • Identify and minimize climate-related risks early on and boost reputation by demonstrating or planning for higher Taxonomy-alignment

  • Foster transparency and security against ‘greenwashing’ to investors, financial institutions, and companies, by providing comprehensive information on relevant Taxonomy criteria, based on real-time results and simulations

  • Improve access to green finance and investment for carbon-neutral technologies and innovation, by indicating alignment of actual and plan data

  • Inspire confidence in stakeholders to make informed decisions while investing in environmentally sustainable economic activities

  • Establish benchmark against peers by early adaptation of EU Taxonomy management regardless of exemption status