As of January 2023, approximately 12,000 firms are required to report on the alignment of their business activities with the EU Taxonomy Regulation: the EU’s green classification system, which translates environmental objectives into criteria for specific economic activities and investment purposes. By 2028, the number of organizations obligated to disclose will reach approximately 50,000.
While the taxonomy could be an invaluable tool for the transparency and standardization of sustainable finance, it has been plagued by usability and interpretative challenges since coming into force. One issue is the taxonomy’s huge scope: the published climate delegated act covers roughly 102 economic activities and the draft environmental delegated act introduces a further 31 activities for biodiversity, pollution, circular economy and water – as well as 46 new and amended activities for climate change mitigation and adaptation. A single project might comprise dozens of different activities; each of which activities a firm must reconcile technical environmental performance data and financial KPIs.
Manual data management processes are likely to prove insufficient in the face of this complexity. Organizations must establish an information architecture that can streamline data management processes and reconcile ESG and financial performance data through system integrations. Business leaders should seek assistance from the increasing number of ESG software providers that have developed specific solutions for EU Taxonomy compliance, including ClarityAI, Greenomy, Sphera, UL Solutions and Wolters Kluwer. Choosing the right technology for an organization’s individual needs will be vital to mitigating the taxonomy’s usability challenges.
