With increased transparency and a common language, everyone can see which investments are sustainable and reduce the risk of greenwashing.
This is the aim of the EU Taxonomy, an essential component of the European Commission’s action plan to direct capital flows towards a more environmentally sustainable economy and an important step in the EU’s Green Deal objective to achieve climate neutrality by 2050.
The Taxonomy Regulation is a classification system of activities that can be considered “environmentally sustainable”. The world’s first ever “green list” to ambitiously attempt to regulate green markets sets a science-based list of sustainable economic activities, assessed on their contribution towards six environmental objectives — climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; the transition to a circular economy, water prevention and recycling; pollution prevention and control; and protection of healthy ecosystems.
Implemented by the EU for two of the six objectives (climate change adaptation and mitigation) in January 2022, the taxonomy provides companies, investors, lenders and policymakers with consistent definitions for which economic activities can be considered environmentally sustainable.
It will benefit investors, protecting them from greenwashing and granting access to comparable, reliable data, and naturally also businesses, by helping them become more environmentally friendly and attract new sources of funding.
Both a classification system and a set of disclosure obligations, the regulation creates disclosure requirements on Taxonomy alignment for financial market participants under the Sustainable Finance Disclosure Regulation (SFDR) and for large firms subject to the Corporate Sustainability Reporting Directive (CSRD), the recently approved law requiring 50,000 EU companies and large non-EU businesses to report their full environmental impact.
Transparency on environmental, social and governance matters will become more the norm for large firms, which will be required to be reported in a standardized, comparable and more consistent format – just like financial reporting. Starting already in 2023, most companies that fall under NFRD will be required by law to disclose their taxonomy alignment in their annual reports, with companies operating in the EU subject to CSRD (the directive amending NFRD) following suit in 2025.
This paradigm shift reaffirms CDP’s mission of driving companies to disclose high-quality, decision-useful data covering all relevant impacts on people and planet, driving change towards sustainable economic activities.
Integration of the EU Taxonomy into CDP’s questionnaire
Starting from 2023, CDP will focus on integrating best practice sustainable finance taxonomy criteria into its questionnaire and scoring, bringing them to life in the real economy.
CDP is piloting questions on the EU Taxonomy within its 2023 Climate Change Questionnaire, focused on gathering data on the two environmental objectives that have been so far approved (climate change mitigation and adaptation).
In practice, this means around 2.400 European companies representing over 70% of European market capitalization will be disclosing information on their taxonomy alignment through CDP, bringing financial and sustainability reporting one step closer to being on an equal footing.
There will be four questions relating to the EU Taxonomy, included in C3 Business Strategy of the CDP climate change questionnaire. After consulting with companies and financial institutions, we modified two existing questions and introduced a couple of new ones. We’ll be asking companies to report their spending/revenue aligned to their climate transition plan, what share of that is aligned with the EU Taxonomy, and how they are verifying this data.
In 2023, only question C3.5a will be partially scored, with the remaining three questions not scored – for now.
CDP has decades-long expertise with bringing corporate reporting to be a business norm. Close to 20.000 companies disclosed in 2022, up 233% since the Paris Agreement in 2015. Disclosing data through CDP is therefore a vital preparatory step for companies and financial institutions subject to the Taxonomy and navigating this new era of mandatory disclosures.
Disclosing on CDP’s sustainable taxonomy questions also means organizations share data on their taxonomy alignment and activities directly with their stakeholders – whether the 680 CDP capital market signatories with $130 trillion in assets, 250+ supply chain members, governments in our new dashboard, or the wider ESG data market that relies on our data.
Market transparency is the basis for action and well-functioning markets need comparability: by collecting data on corporates’ use of sustainable finance taxonomies in one place, companies will provide investors, and other stakeholders, access to information that is consistent, comprehensive, and comparable across geographies and regulatory requirements.
As the only global environmental disclosure system, CDP plays a crucial role in accelerating the implementation of standards at scale – including sustainable finance taxonomies. As announced at COP27, CDP will also be incorporating major standards like the International Sustainability Standards Board (ISSB) S2 climate standard from 2024, and we are committed to aligning with the high ambition European Sustainability Reporting Standards as they are developed.
In line with CDP’s strategy, we will continue to ask the right questions so that the data we collect, distribute and analyze ensures European companies are on top of regulatory requirements. The spotlight is now on businesses and investors to show they can drive positive change on behalf of all people, the planet and the economy.