The term “taxonomy” refers to the European Parliament and Council Regulation (EU) 2020/852 of June 18, 2020, regarding sustainable investment processes. The aim of this regulation is to enhance environmental protection as outlined in the Paris Agreements. The regulation requires entities to disclose their development directions, enabling the European Commission to discourage environmentally harmful investments in favor of green alternatives. This act responds to the mass emergence in Europe of investments advertised as eco-friendly but were not, a phenomenon known as “greenwashing.”
From 2024, large companies with over 500 employees, subject to the Non-Financial Reporting Directive (NFRD), will be required to conduct taxonomy reporting.
Taxonomy Reports Focus on Two Areas:
The percentage of products and services classified as sustainable.
The percentage of capital and operational expenditures directed at developing sustainable processes.
A mechanism is introduced that will enforce the distribution of public funds, subsidies, and the issuance of green bonds in EU member states.
Non-Financial Reporting Requirements in Taxonomy:
Companies must disclose:
The percentage of revenue from sales classified as aligned with the EU taxonomy.
Capital expenditures (CapEx) classified under the EU taxonomy.
Operational expenditures (OpEx) aligned with the EU taxonomy.
This information disclosure should be part of the non-financial report, in the annual report, or another similar sustainability report.
The Food Industry in the European Commission’s Project
In April 2023, the European Commission published a draft regulation outlining technical criteria, highlighting three main industries for taxonomy focus: chemical, transport, and food. The European Commission also pointed to recycling, understood as the process of repair or resource recovery, as an additional area of interest, which will also be evaluated under technical qualification criteria.
These acts are set to take effect on January 1, 2024, when non-financial companies will also be required to report on activities qualifying for the EU taxonomy in the two areas mentioned above, with recycling excluded for now.
Key Points about EU Taxonomy
The taxonomy is about obtaining eligibility status. For eligibility to be achieved, an entity, process, or other unit must contribute to at least one of the two environmental goals specified in Regulation 2020/852, namely climate change mitigation or climate change adaptation. The European Commission is working on four more goals, which will also serve as qualification criteria.
Climate change mitigation and adaptation goals can be realized directly or indirectly. For example, a food processing plant building a wind or solar power station to meet its needs achieves climate goals directly. In contrast, the commercial production of wind turbine blades indirectly supports climate-related goals.
Taxonomy in the Food Industry
There are types of activities that cannot be considered environmentally friendly but may still be eligible when there is no technical possibility of climate-neutral production. In such cases, the process is recognized as transitional until technologies enabling climate goals are developed and implemented.
If a production process has the lowest greenhouse gas emissions in its industry and theoretically allows for future low-emission solutions that are currently unavailable, according to the taxonomy, it is eligible as it has potential to contribute to climate goals. The European Parliament and Council Regulation (EU) 2020/852 does not mandate the qualification of such processes but suggests that companies that choose to classify these activities will be more attractive to financial institutions and EU grant committees. The regulation requires that non-financial reports include the company’s environmental impact.
Capital Expenditures (CapEx) and Operational Expenditures (OpEx)
The EU recommends including all CapEx and selected OpEx, such as the costs of maintaining green assets that increase the longevity or value of assets, as well as R&D costs within CapEx.
Examples of Taxonomy Applications
Taxonomy methodology distinguishes between activities that influence climate change mitigation and activities that enhance the company’s adaptive capacities in response to climate change. This distinction is shown in the examples below.
Example 1
A fruit and vegetable processing company aims to reduce CO2 emissions and energy consumption by introducing new production equipment.
This investment should be classified as CapEx, as it directly impacts climate change mitigation.
Example 2
A bakery suffers repeated flooding due to a nearby river. The plant decides to build embankments around its truck parking lot, where flooding frequently occurs.
This investment should be disclosed in CapEx as it protects the plant and improves its adaptive capacity to climate change, such as frequent floods. The plant may indicate that 70% of the investment aligns with climate adaptation criteria. Soundproofing of the plant’s noise emissions was also addressed in this investment, which is unrelated to taxonomy criteria.
Example 3
The bakery has deep-freeze storage; bread production followed an 18-cycle defrosting schedule. Calculations showed that modifying the production schedule would reduce energy consumption and minimize unsold product disposal.
Such actions should be disclosed in OpEx and as revenue, as they directly mitigate climate change.
Example 4
The bakery launched an insulation project for the metal completion hall, which is not heated.
This action should be disclosed in CapEx as an investment improving the plant’s adaptability to climate change. The main reason for insulating the completion hall was the high summer temperature in that room. The plant can disclose that 100% of the investment aligns with taxonomy criteria.
Example 5
The bakery launched a new machine to process unsold bread, converting it into a mass that can be added to other products without losing quality or flavor. The machine was amortized last year.
This action should be disclosed in OpEx and as revenue, as it reduces climate change processes. According to the European Commission’s April 2023 project, four more climate goals will emerge in the future, one of which will be to improve the efficiency of waste and unused raw material processing. The bakery disclosed that 15% of revenue and related OpEx expenses align with taxonomy goals.
Summary
The emergence of sustainable investment regulations in the European Union is closely linked to the Paris Agreements.
At the 2015 UN Climate Change Conference, an agreement was reached, committing all participating countries to present long-term greenhouse gas reduction scenarios by 2020, according to IPCC methodology. The agreement confirmed previously established national goals (INDC – Intended Nationally Determined Contributions), while highlighting that they are insufficient to limit global warming to below 2°C and encourages the establishment of new, more ambitious climate goals. The agreement was accepted by all 195 participating countries, with the signing period set to begin on April 22, 2016.
Goals of the Agreement Defined in Article 2:
Limiting global warming to well below 2°C, with a target of 1.5°C above pre-industrial levels, to reduce risks and damages from climate change.
Adapting to and mitigating climate change impacts, enhancing resilience, and fostering low-emission development without compromising food production.
These are similar goals to those in the legal acts of the discussed taxonomy. Non-Financial Disclosure Reporting Directive (NFRD) will play a significant role in accessing European funds, thereby shaping the modern sustainable economy of the European Union.
Wojciech Moszczyński
Graduate of Quantitative Methods at the Nicolaus Copernicus University in Toruń, specializing in econometrics, data science, and management accounting. He specializes in optimizing production and logistics processes. He has conducted research in AI development and application and has been involved in popularizing machine learning and data science in business environments.