
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 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 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).
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