The challenges of implementing the EU Taxonomy - practical advice

Background

As Europe pushes towards a sustainable economy, the European Union (EU) has introduced a set of initiatives aimed at embedding sustainability into financial and corporate decision-making. A key part of this transformation is the EU taxonomy, a regulatory framework designed to provide businesses, investors, and governments with clear criteria for identifying environmentally sustainable economic activities. It’s a cornerstone of the EU’s Green Deal, which aims to achieve climate neutrality by 2050 and foster a more resource-efficient economy.

The EU taxonomy is not a stand-alone initiative. It is embedded in a wider regulatory landscape that includes the Corporate Sustainability Reporting Directive (CSRD) – the EU Taxonomy requirements have to be disclosed in the Environmental section of the CSRD report. Together, these initiatives create a harmonised approach to sustainability in order to improve transparency, prevent greenwashing, and encourage investment in truly sustainable activities.

At its core, the EU taxonomy establishes a classification system for sustainable activities based on six environmental objectives covering climate change mitigation and adaptation, sustainable use of water resources, transition to a circular economy, pollution prevention and control, as well as protection of biodiversity and ecosystems. Companies must assess whether their activities meet the “technical screening criteria” (TSC) under one or several of these objectives as well as the “Do no significant harm” (DNSH) criteria and minimum social safeguards to qualify as ”EU Taxonomy-aligned”. However, there is still considerable uncertainty in the market regarding how to interpret the legal text and operationalise the screening criteria, adding another layer of complexity for businesses trying to align with the framework. 

As companies and financial market participants grapple with the implementation of the EU taxonomy, they face the dual challenge of meeting technical criteria while aligning internal processes with broader EU sustainability goals, as well as difficulties in data collection, analysis, and reporting.

Navigating the complexities of the EU taxonomy

 Since January 2022, the EU taxonomy has required industrial and financial companies to gradually report on eligible and aligned activities, with 2024 marking the third year of reporting. To achieve taxonomy alignment, an activity must substantially contribute to one of the six environmental objectives, ensure no significant harm to the other objectives, and comply with the minimum social safeguards outlined in the regulation.

We observe that our clients face several key challenges in the implementation of the EU taxonomy. One of the most significant is the complexity of interpreting the technical screening criteria, which often vary by sector and require detailed performance data that can be difficult to collect. Additionally, companies struggle with ensuring compliance across global operations, particularly when it comes to adherence to the “Do No Significant Harm” (DNSH) criteria and to the minimum social safeguards, both of which require a thorough assessment of internal and supply chain practices. These challenges are compounded by the need for consistent and transparent data reporting, placing significant strain on internal processes and resources.

PwC’s 7-step-approach to EU taxonomy implementation

PwC has developed a 7-step approach to EU taxonomy implementation that addresses the key challenges companies face throughout the entire adoption process – and we would like to share our best practice tips for each challenge.

Step 1: Scoping

Before defining the key challenges of EU taxonomy implementation and delving into this approach, it’s important to recognise that companies may not always be fully aware of the timelines, the complexity of legal interpretation, the required effort, or even whether they fall within the scope of the regulation. This initial scoping stage is crucial for understanding the task’s complexity and preparing for the challenges ahead. A legal scoping assessment can help clearly define tasks and responsibilities and avoid delays.

Best practice tips: 

• Conduct a thorough legal scoping assessment​.
• Clearly define tasks and responsibilities to prevent delays. ​
• Emphasise steady progress over perfection or completeness.

Step 2: Identification of eligible activities

Accurate identification of eligible activities is the basis for alignment with the EU taxonomy. While the regulation’s delegated acts provide descriptions, these can be broad, making it difficult to assess eligibility. With over 100 listed activities and regular updates, companies need to thoroughly analyse their activities to map them against the description of each activity included in the Annex of the delegated acts. PwC helps companies navigate this complexity across sectors and geographies, ensuring compliance with the evolving taxonomy requirements and providing a solid foundation for transparent reporting.

Best practice tip:

• Establish a clear methodology for assessing taxonomy eligibility and implement processes to continuously monitor changes in the EU taxonomy criteria and regulatory landscape.

Step 3: Substantial contribution assessment

The third step addresses the substantial contribution criteria, which require businesses to demonstrate how their activities contribute significantly to one or more of the EU’s six environmental objectives. The complexity of the technical screening criteria can lead to challenges in terms of interpretation. Additionally, these criteria often refer to other European standards, regulations, and certificates that may not apply to operations outside of Europe.

Best practice tip:

• Prioritise the evaluation of technical screening criteria for activities that are consistent and recurring within your organisation.

Step 4: Do No Significant Harm (DNSH) check

A key aspect of taxonomy alignment is to ensure that eligible activities do not cause significant harm to the environmental objectives other than the one(s) for which there is the substantial contribution. The DNSH criteria are complex and include activity-specific but also generic requirements that apply to all activities. For example, the generic DNSH criteria for pollution prevention refer to six different EU regulations and directives covering several hundreds of chemical substances. PwC’s approach at this stage focuses on helping companies through the extensive and often resource-intensive process of DNSH assessments.

Best practice tip:

• Streamline efforts and leverage overlaps between DNSH requirements and other regulations. For instance, align the DNSH criteria on climate risk and vulnerability assessment with ESRS E1 climate risk scenarios to create a unified approach to climate-related risks and vulnerabilities.

Step 5: Compliance with minimum safeguards

The EU taxonomy requires adherence to minimum social and governance safeguards, including labour rights, human rights, and anti-bribery standards. Based on internationally recognised frameworks with extensive compliance requirements, these safeguards can be challenging to apply consistently across global operations. PwC helps companies integrate these safeguards into their internal practices and supply chains, and assesses compliance with standards such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.

Best practice tip:

• Ensure consistent standards on human rights, anti-corruption, bribery, taxation, and fair competition across all your in-scope entities. Link these efforts to upcoming requirements such as the Corporate Sustainability Due Diligence Directive (CSDDD) to stay ahead of evolving regulations.

Step 6: KPIs and filling in the regulatory templates

The calculation of KPIs for EU taxonomy disclosure purposes presents significant challenges. The process requires extensive financial data, which is often scattered across different accounting systems, making data collection complex and time-consuming. In addition, some KPI denominators differ from established financial accounting standards – for example, definitions of operational expenditure (OpEx) may not be consistent – adding further complexity to the calculations. Financial institutions also rely on non-financial companies’ KPIs to calculate their own, which can lead to data unavailability if these KPIs aren’t easily accessible. Insurance companies must evaluate the most appropriate methodologies to determine the climate-related peril portion in premium for their underwriting KPI disclosure. PwC can help companies establish robust data collection processes and harmonise reporting practices.

Best practice tip:

• Ensure uniformity in data collection processes and related controls to maintain consistency and accuracy. Developing appropriate calculation processes and documenting them is key. 

Step 7: Assurance

The EU taxonomy disclosures must be integrated into the company’s sustainability statement as required by the CSRD. Initially, these disclosures require a limited assurance opinion, with the possibility of evolving to reasonable assurance in the future, subject to confirmation by the EU. PwC provides independent assurance resulting in transparency and thus trust with stakeholders. 

Best practice tip:

• Sufficiently document your approach as well as your outcome. Further, engage your assurance provider early in the process and involve it in all steps to ensure a smooth, compliant integration of EU taxonomy disclosures into your sustainability reporting.