EU advisors tell Commission how to cut Taxonomy burden by ‘more than a third’

Report calls for materiality thresholds and comply-or-explain approach to DNSH

The EU’s advisory body has recommended sweeping changes its green taxonomy, which it claims could reduce the regulations’ reporting requirements more than a third.

The Platform on Sustainable Finance, whose job it is to shape the European Commission’s thinking on files like the Sustainable Finance Disclosures Regulation and the EU Green Bond Standard, has today published more than 100 pages of suggested reforms to the taxonomy.

The recommendations include a suggestion that companies should be allowed to decide whether an economic activity is material to its business before having to report on it.

“Under this approach, non-financial undertakings would assess the extent to which their business model and more specifically the activities they operate meet the description of the activity in the Climate or Environmental Delegated Acts as possibly identified also through the NACE codes,” the report explained.

“Should the assessment demonstrate the immateriality of the Taxonomy for part or all of company’s activities, then the undertaking would simply report that those activities are assessed to meet the description of certain economic activities under the EU Taxonomy but deemed to be immaterial.”

The current obligation to disclose the taxonomy-alignment of operational expenditure should become voluntary, the Platform recommended, except for spending related to research and development.

Companies should also be allowed to take a ‘comply-or-explain’ approach to the Taxonomy’s Do No Significant Harm (DNSH) requirements.

Those requirements, which seek to ensure business activities that contribute to one environmental objective don’t simultaneously undermine another, are among the most unpopular and challenging parts of the regulation, and are often blamed for companies’ decision to say they have no ‘taxonomy alignment’.

That’s partly because it can be very difficult to prove past actions have been taken, especially if an asset or business has changed hands over its lifetime.

The Platform has therefore proposed that the Commission allows companies to explain why they can’t comply with certain DNSH criteria for their revenues.

This would provide policymakers with more robust information about key stumbling blocks, which could inform a future revision of DNSH – after which point, the rules may become mandatory again. .

DNSH requirements should remain in place for CapEx, PSF said, because those disclosures are not backward-looking.

These changes, along with others covering lenders and SMEs, would “lead to a reduction of over a third in the reporting burden for non-financial companies,” the Platform said.

The Commission plans to include the Taxonomy Regulation in an omnibus proposal later this month, as part of its promise to reduce the EU’s corporate reporting requirements by 25%.

But there are concerns that re-opening the underlying legal text will result in more profound changes to the law, such as its scope and ambition, because it have to go through political renegotiation.

The PSF’s report is careful to stress that its proposals would surpass the Commission’s 25% target without touching the ‘Level One’ text. All its recommendations centre on technical changes at ‘Level 2’, via the Disclosures Delegated Act.