Why SMEs Should Pay Attention To EU Taxonomy
While primarily aimed at corporates, small firms should also give careful consideration to the EU rules promoting sustainable finance, writes
In 2019, the European Commission agreed a new growth strategy called the ‘European Green Deal’ with a target to achieve a climate-neutral continent by 2050. The strategy is designed to make society more resilient to the impacts of climate change and to boost prosperity through a clean and circular economy.
The Commission estimates additional investments of around €700bn every year will be required to meet the objectives of the Green Deal. The bulk of these investments will have to come from private funding. Much of this funding will be deemed transition finance or sustainable finance, and will be provided at more attractive terms than normal by funders to encourage and stimulate investment in greenrelated activities.
The more attractive terms are partly a reflection that funders will deem those companies engaging in green supportive activities to have a lower risk profile than those continuing to engage in less sustainable or unsustainable activities. Going forward, the latter may incur even greater cost of capital or difficulty in accessing funding as banks and large financiers come under increased stakeholder and regulatory pressure to decarbonise their portfolios and supply chains.
The EU Taxonomy is one of several building blocks put in place by the bloc since 2018 to promote more sustainable finance. The European Commission describes the Taxonomy as a “common dictionary for economic activities substantially contributing to the EU’s climate and environmental objectives”. The Taxonomy regulation is a classification system of activities to promote transparency and to help companies and investors make decisions that are sustainable and align to the long-term aims of the Green Deal. The objectives of the Taxonomy include:
Scale up investment in six Taxonomy environmental objectives areas, namely: climate change mitigation; climate change adaptation; water and marine resources; circular economy; pollution prevention and control; and biodiversity protection and restoration.
Help companies plan and finance their green transition. Protect investors from greenwashing. Harmonise what are deemed green activities.
The Taxonomy is not a mandatory check list but instead provides a list of criteria which have four main conditions for an activity to be deemed environmentally sustainable: Make a substantial contribution to at least one environmental objective.
Do no significant harm to the other five.
Comply with minimum safeguards. Comply with technical screening. Transparency is a primary objective, as “disclosure by companies of Taxonomy-aligned activities will mean that there is more reliable, comparable sustainability information publicly available on the market for investors and stakeholders” according to the Commission. The disclosure referred to applies generally to larger companies that will have mandatory information reporting and disclosure requirements around alignment to the Taxonomy.
SMEs should also be taking note of the wider implications of the Taxonomy regime and the potential benefits of aligning with Taxonomy criteria. The EU Taxonomy is designed as a ‘living’ classification, subject to ongoing changes, and in June 2023 the Commission announced a new set of Taxonomy-related criteria for economic activities making a substantial contribution to the EU’s environmental objectives. These are: Sustainable use and protection of water and marine resources. Transition to a circular economy. Pollution prevention and control. Protection and restoration of biodiversity and ecosystems.
SMEs involved in any of these activities may be able to reference the classifications as evidence of partial alignment to the Taxonomy when seeking funding or finance. It may even encourage SMEs to deepen their involvement in some of these areas, as supporting green investments is part of the rationale behind the Taxonomy, according to the EU. “By clearly defining what is aligned with the EU environmental goals, the Taxonomy seeks to encourage companies to launch new projects, or upgrade existing ones to meet these criteria,” the Commission explains.
While non-listed SMEs, in particular micro enterprises, are not subject to mandatory reporting under the EU’s sustainable finance regulatory framework, some SMEs may be interested in financing green investments and can benefit by using sustainable finance tools voluntarily.
For SMEs there is a clear rationale for incorporating the Taxonomy into
their considerations when developing strategy and growth plans for the future in order to help them to access sustainable finance. This should be done in planned manner, says the Commission, adding that SMEs may need the support of value chain partners when considering their transition finance requirements.
The Commission is nudging nonlisted SMEs in the Taxonomy direction on the basis that if you are a supplier to large European companies disclosing under the Taxonomy, these companies may also demand some information on your products in order for them to assess and disclose the potential impacts of their outputs.
To sum up, the EU Taxonomy is an important piece of the Commission’s building blocks to promote and encourage the use of sustainable finance to underpin the European Green Deal and the decarbonisation agenda. The Taxonomy is aimed primarily at large companies in the
first instance to help drive the green agenda forward. Over time it will impact SMEs too, due to a viral effect of large companies cleaning their supply chains, and due to both the carrot and stick approach that will be applied by financial institutions.
The Corporate Sustainability Reporting Directive (CSRD)
came into effect in January 2023, and EU member states have 18 months in which to transpose the directive into law. The directive arises from the Green Deal’s climate change action objectives, and adds
more reporting obligations on affected corporates in relation to carbon emissions and environmental data.
It expands the scope of the existing rules for non-financial reporting by large companies and public-interest entities to large companies, large public-interest entities, and listed SMEs (excluding micros) on a main European Union stock market. Companies in scope will be required to report annually in their management or directors report on environmental, social and governance (ESG) and human rights matters according to the EU mandatory standards.
Mandatory reporting requirements will commence for financial years on or after:
1 January 2024 for public interest entities with over 500 employees. 1 January 2025 for companies with over 250 employees.
1 January 2026 for listed SMEs, with an opt out possible until 2028.
‘The Commission is nudging non-listed SMEs in the Taxonomy direction’
As part of its Better Everyday strategy, ALDI has taken significant steps to combat food waste through partnerships with both FoodCloud and Too Good To Go. To date, ALDI’s food waste partnerships have diverted more than 1 million kilos of food from going to waste.
Food waste is an urgent worldwide environmental and social issue. Food retailers play an influential role in the supply chain, providing a link between producers and consumers. ALDI understands that as a large retailer, business growth must go hand-in-hand with a robust Sustainability Strategy and that business activities can have a significant impact on climate and the environment.
In line with Ireland’s National Food Waste Prevention Roadmap 2023-2025, ALDI has introduced a Low Waste to No Waste strategy that consists of wide range of projects and initiatives to help deliver a 50% reduction in food waste by 2030. This is under the ‘Greener’ pillar of ALDI’s Better Everyday Sustainability Strategy.
FOOD WASTE PREVENTION INITIATIVES
ALDI store colleagues are encouraged to either redistribute or reduce any food, that is fit for consumption, minimising waste. This is supported by the below initiatives with the aim to reduce food waste by 500 tonnes this year: Food waste KPI’s have been introduced in store operations to encourage stores to redistribute and repurpose food waste as a priority.
Sale of reduced products (30%, 50%, 75%). Surprise Bags via Too Good To Go. FoodCloud charity donations across stores and regional distribution centres.
Since partnering with FoodCloud in 2014, ALDI has donated over 1.2 million kilos of surplus food from stores and distribution centres. This equates to 2.8 million meals to local charities through FoodCloud’s network, resulting in 3.8 million kgs of CO2 emissions avoided.
In January 2023, ALDI was the first Irish retailer to
partner with food surplus app, Too Good to Go. The partnership enables ALDI to cut down on food waste, whilst also offering customers the opportunity to purchase food at even lower prices. This initiative not only positively impacts the environment but is also mutually beneficial from a business and a consumer perspective.
To avail of a Too Good to Go Surprise Bag, shoppers can download the free app and search for their nearby ALDI store before reserving a bag to collect. Since commencing the partnership, ALDI has already provided more than 50,000 Surprise Bags to its customers, and in doing so helped to avoid over 106,000kg of CO2 emissions.
MEANINGFUL ACTION
Speaking on food waste, ALDI Ireland National Sustainability Manager, Rachel Nugent, commented: “ALDI is proud to take stock of our efforts in combating food waste. Through our partners, FoodCloud and Too Good To Go, we are taking meaningful action to cut down on food waste in our logistics chain, while also donating to worthy causes.
To date, we have saved over 1 million kilos of food waste since beginning our partnerships, both with FoodCloud since 2014 and with the addition of Too Good To Go this year. As part of our overall sustainability strategy and ambitions, we pledged earlier this year to eliminate 60 tonnes of food waste from our operations by the end of
2023. Having already delivered on this commitment, we look forward to continuing to work with our partners and colleagues to strive towards our new goal of eliminating a total of 500 tonnes this year.”