How European financial and non-financial companies are implementing the EU Taxonomy Regulation
The EU Taxonomy Regulation has been in force for more than a year, both for financial and non-financial companies. This classification system distinguishes between “Taxonomy eligible” and “Taxonomy aligned” economic activities: Taxonomy eligible economic activities are those that can in principle be assigned to an economic activity (“eligibility”). Taxonomy aligned activities are those that also fulfill the associated criteria (technical screening and minimum safeguards criteria) (“alignment”).
PwC has already analysed the current state of Taxonomy reporting in 2022. This year PwC has extended the analysis to industrial and financial companies across Europe. The key finding: the EU Taxonomy reporting of the analysed companies and institutions still lacks transparency and comparability.
To whom the EU Taxonomy applies
Large, listed industrial companies with more than 500 employees must report on the share of their Taxonomy eligible economic activities in turnover, capital expenditure and operating expenditure. Since financial year 2022 they are subject to full Taxonomy reporting, i.e. including Taxonomy-alignment.
Financial institutions must report to which extent their asset and financing portfolios are Taxonomy eligible. They depend on the reported data of their counterparties, mostly industrial companies, for their reporting. Taking this into consideration they are only subject to Taxonomy alignment reporting from financial year 2023. Due to the different reporting requirements for financial and non-financial companies, the respective findings are presented separately.
The study at a glance
The results for European non-financial companies in detail
Just under half of the industrial companies report their EU Taxonomy disclosures in the sustainability report, slightly more than a quarter in the annual report and 11 percent in the management report. 66 percent of industrial companies use the templates for turnover, capital expenditure and operating expenditure provided by the EU Commission for non-financial companies – a low figure, after all, their use was already mandatory. And: 86 percent of industrial companies disclose the key figures for each economic activity.
Large discrepancy between Taxonomy eligible and Taxonomy aligned turnover
The large discrepancy between reported Taxonomy eligibility and Taxonomy alignment is striking: The average reported Taxonomy eligibility across all industries is 26 percent for turnover. Only seven percent report Taxonomy alignment.
The highest Taxonomy eligible turnover was reported by Real Estate (65%) and the Automotive industry (46%). The lowest were reported by the Health Industries (0 %) and Retail & Consumer (5%). The highest Taxonomy aligned turnover was reported by Energy, Utilities & Resources (20%) and Real Estate (16%); the lowest was also reported by the Health Industries (0%) and Retail & Consumer (1%).
Taxonomy eligible and Taxonomy aligned capital expenditure (CapEx)
In terms of CapEx, Real Estate also leads with 63 percent of Taxonomy eligible capital expenditures, followed by Energy, Utilities & Resources (56%) and the Automotive industry (54%). There is also a large discrepancy with Taxonomy alignment in capital expenditure: the average Taxonomy eligible capital expenditure is 37 percent, only about a quarter are reported as Taxonomy aligned. In the Automotive industry, for example, only 15 percent of 54 percent Taxonomy eligible capital expenditures are reported as Taxonomy aligned.
The most frequently reported EU Taxonomy economic activities with the largest share of Taxonomy eligible and Taxonomy aligned capital expenditure are 3.3. “Manufacture of Low-Carbon Technologies for Transport” and 7.1 “Construction of New Buildings”.
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EU Taxonomy Reporting 2023
Taxonomy eligible and Taxonomy aligned operating expenditure (OpEx)
The average taxonomy eligibility of OpEx is 27 percent, only eight percent are taxonomy aligned. The automotive industry is in first place with 49 percent taxonomy eligible operating expenses, followed by Energy, Utilities & Resources with 43 percent and Transport & Logistics with 37 percent. Bringing up the rear are once again the Retail & Cosumer and Health industries with eleven and two percent respectively.
Market observations
There are significant differences between the individual sectors: the Automotive, Energy, Utilities & Resources and Real Estate sectors have the highest ratios for Taxonomy eligible economic activities, whereas Retail & Consumer and the Health industries have the lowest. But companies in the same industry or with the same business model also report very heterogeneously.
The discrepancy between the reported Taxonomy eligible and Taxonomy aligned economic activities is striking. One reason may be different data availability in the respective companies. It is also possible that companies are still unsure about the conformity criteria, the technical screening criteria and the minimum safeguards.
“Companies must continue to grapple with the complexity of the EU Taxonomy, especially as reporting on additional environmental objectives is imminent.”
The results for European financial institutions in detail
Financial companies calculate their Taxonomy KPIs based on data from their counterparties. These are predominantly non-financial companies which the institutions are financing or in which they have invested. Consequently, the quality of financial institutions’ reporting largely depends on that of their counterparties. In addition, the Taxonomy regulation is being introduced step by step and companies are currently still in a transition phase with incomplete reporting obligations. This results in an inadequate data basis, with negative effects on the quality of disclosure.
In contrast to non-financial companies, the financial sector is not subject to full Taxonomy reporting, i.e. does not have to report on Taxonomy alignment until financial year 2023. Few financial institutions have used the reporting templates provided by the EU Commission. Their use will become mandatory in 2024 and it is assumed that this will lead to a greater standardisation of calculation methods.
There are large discrepancies between the reported Taxonomy KPIs by financial institutions, indicating that differing calculation methods were applied. The KPI for turnover-based Taxonomy eligible activities range from 0 to 76 percent; the KPIs for CapEx-based Taxonomy eligible activities range from 0 to 75 percent.
Many financial institutions do not disclose their calculation methods. Some criticise the Taxonomy reporting and the quality of the data from non-financial companies that they need for their own reporting. Interestingly, 39 percent show comparative figures from the previous year – that's a decent value when you consider that only ten percent of non-financial companies show comparative figures from the previous year. However, a meaningful comparison will only be possible once Taxonomy reporting has been fully implemented and the calculation methods have been aligned.
Market observations
For financial institutions, the Taxonomy KPIs are influenced by the business model. For example, banks that primarily finance small and medium-sized enterprises (SMEs) currently have lower ratios than banks whose business partners are primarily listed companies. This is due to the fact that financing activities for SMEs are so far not Taxonomy eligible.
“Taxonomy data will be an important reference for investors in the long term. But to make Taxonomy reporting useful for investors the data must be comparable. To achieve this, non-financial companies must optimize their data collection and processing and financial institutions must ensure greater standardisation of their calculation methods.”
Christoph Schellhas,Partner and Financial Services Sustainability Leader at PwC GermanyDownload the complete study
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The methodology
PwC analysed the reports for fiscal year 2022 published up to April 30, 2023 by 706 listed European non-financial companies and 146 listed European financial institutions that fall within the scope of the EU Taxonomy. PwC has thus expanded the scope of last years’ study which was based on the first 50 taxonomy reports from industrial companies published in Germany.
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