What Challenges for Companies in Adapting to the European Taxonomy

The European Taxonomy represents one of the main tools of the European Union to incentivize sustainable investments and support the transition to an economy with a low environmental impact. Introduced as an integral part of the European Green Deal, the Taxonomy provides a clear and uniform classification to determine which economic activities can be considered sustainable. However, complying with this regulation presents several challenges for companies that intend to be compliant. From data collection to regulatory compliance, businesses face a number of technical, financial, and operational hurdles.

Understanding and Interpretation of the Sustainability Criteria

One of the main challenges is to understand and correctly interpret the criteria defined by the European Taxonomy. This regulation lists specific requirements for six environmental objectives:

– Climate change mitigation

– Adaptation to climate change

– Sustainable use and protection of water and marine resources

– Transition to a circular economy

– Prevention and control of pollution

– Protection of biodiversity and ecosystems

Every company must evaluate whether its activities contribute substantially to one or more of these goals. This step requires in-depth analysis, as the taxonomy criteria are detailed and industry-specific. Companies must also ensure that their activities do not significantly harm other environmental objectives (the “Do No Significant Harm” principle), which requires additional assessment and verification.

Data Collection and Management

The European Taxonomy requires companies to provide accurate and transparent data on their activities, which is a significant challenge, especially for companies that do not have structured ESG (environmental, social and governance) data collection systems. Many companies need to develop new metrics and indicators, implement monitoring software, and adopt more accurate data collection practices to ensure that the information provided is verifiable and compliant with regulatory requirements.

This phase can require significant investments in technology, training, and human resources, especially for small and medium-sized enterprises (SMEs) that may not have dedicated ESG data management teams.

 Adaptation and Change of Business Processes

For many companies, being compliant with the European Taxonomy involves overhauling internal processes and adopting more sustainable practices. For example, a company operating in the energy sector may need to invest in renewable sources or low-emission technologies to ensure that its operations are considered sustainable.

This adjustment often requires a significant cultural and operational change, as the company must align its strategy and business objectives with those defined by the Taxonomy. In addition, companies must establish internal processes to continuously monitor and improve their environmental and social performance.

Audit and Transparency of Reports

The European Taxonomy requires companies to demonstrate compliance through accurate and transparent ESG reporting. Companies must provide details about their sustainability goals and demonstrate how their activities contribute significantly to the taxonomy’s goals.

To ensure that the information provided is reliable, companies must be prepared to have their reports subject to external audits, which implies additional costs and the need for rigorous quality checks. In addition, the Taxonomy imposes high standards of transparency, which means that companies must be prepared to openly communicate both their successes and areas for improvement.

Access to Resources and Financing

Adapting to the European Taxonomy can be a financial challenge. Investments in new technologies, data management systems and training initiatives can be costly, especially for companies that need to completely overhaul their operating model. However, taxonomy compliance can also open up opportunities for access to sustainable financing, as investors are increasingly interested in supporting companies that demonstrate a concrete commitment to sustainability.