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EU Taxonomy Background

The European Union (EU) has been at the forefront of implementing strict and formalized regulations for sustainability action, beginning with the establishment of the Millennium Goals as part of the United Nations' commitment to global action at the turn of the century. These goals were revised globally in 2015 and introduced as the 17 UN Sustainable Development Goals. Since then, significant efforts have been made to establish metrics, frameworks, and systems to capture sustainable actions by corporations, governments,

and businesses. Actions in the US, such as redefining the purpose of a corporation, have sparked global discussions on capitalism, opening doors to new business opportunities.

One such system is the EU taxonomy, which "is a classification system, establishing a list of environmentally sustainable economic activities." Its purpose is to drive environmental action through investment shifting, avoiding greenwashing, market fragmentation, and elevating companies' potential to drive climate-friendly business models. The taxonomy regulation was initially published in the Official Journal of the European Union on June 22, 2020, and came into effect on July 12, 2020. However, several changes and comments are still in progress to validate its purpose.

The Taxonomy Regulation contains six environmental objectives: climate change mitigation, climate change adaptation, water protection, circular economy, pollution prevention, and biodiversity. This taxonomy provides guidance in each area and has done so in phases. The first and second delegated acts were published in December 2021, with action starting in January 2022, containing guidance for climate mitigation and adaptation, as well as providing strict Technical Screening Criteria (TSC), company guidance on reporting, fiduciary duties towards the European green deal, and more. Complementary delegated acts for climate also provide guidance for natural gas and nuclear use to expedite the transition away from fossil fuels.

Notably, the mandatory disclosure nature of the taxonomy applies to financial and non-financial activities. Public companies are the focus, but companies matching two of the following criteria are also subject to the rule: a balance sheet total of EUR 200 million, a net turnover of EUR 40 million, or an average of 250 employees during the fiscal year. These companies, whether private or public, are required to disclose using associated taxonomy protocols.

The complementary delegated act commits to areas that could be transitional or renewable energy sources, including natural gas and nuclear energy. The commission has included TSC screenings for these energy sources. This process is still under review and requires final approval to trigger action and innovation. This matters as the EU currently averages 12.7% of nuclear energy (with France at 41%) and 23.7% of natural gas.

Other Aspects of the EU Taxonomy

1. Forced Labor Monitoring: Supply chain evaluations, evaluation of risky contractual relationships, government regulations. Germany already has a law for forced labor for companies with 3,000+ employees.some text
   • Startup Potential Themes: Supply chain management, contract management with an ESG view, translation services for codes of conduct, ESG auditing automation, global legal practices enforcement, and jurisdiction.
2. Environmental Criminal Law (2022-2025): Looking for programs in action like the Zero Pollution Action Plan, Circular Economy Action Plan, and Biodiversity Strategy for 2030.some text
   • Startup Potential Themes: Waste management treatment, timber trade, illegal ship recycling, illegal abstraction of water.
3. EU Green Bond Standard: Developed to guide the use of bonds for green activities, ensuring taxonomy alignment, transparency through detailed reporting, external compliance review, and supervision by the European Securities Market Authority.some text
   • Startup Potential Themes: Fintech and financial deployment of combined capital (debt + equity + PPP).
4. Greenwashing Regulation:some text
   • Startup Potential Themes: ESG compliance and monitoring tools, transparency solutions, certification processes.

UK Climate Response Post-Brexit

The UK Government established the UK Emissions Trading Scheme (ETS) and Task Force on Climate-related Financial Disclosures (TCFD)-aligned reporting mechanisms starting in April 2022. This regulation applies depending on the level of emissions experienced by companies. Potential thematic areas of innovation include:

• Emissions trading registry
• Verification of emissions

Startups to Watch in the UK per PwC Net Zero - Future50

The PwC report highlights several barriers and accelerators for each technology driver as it applies to ESG investment in the UK.

Startups in Sustainable Management

1. Novisto: ESG data management and integration. Series A. Invested by Diagram Ventures, Formentera Capital, and Portage Ventures. www.novisto.com
2. Pelt8: Switzerland-based ESG data management.
3. ETQ Reliance QMS: Currently used in the chemical industry and others.
4. OneTrust: Global regulators.
5. Workiva (Public)
6. Donesafe
7. Goby: ESG and accounts payable.
8. Mapistry: Construction mapping.
9. CEMS: Emissions monitoring.
10. Enablon: Environmental data entry for facilities.
11. RETScreen
12. Gensuite: Environmental management software.

Entrepreneurship Insights from Berkeley ESG Conference

• The ISSB is forming standardized methods of reporting with a global view.
• Materiality assessment is a continuous topic of discussion between auditors, framework developers, and company guidance.
• It's essential for SMEs to have the bandwidth to report.
• Utility data is not widely available for SMEs or even franchises, requiring easier and faster access to this data.
• The real challenge is Scope 3 GHG emission measurement and action planning.
• Products focusing on cost to capital and investment risk are needed, as banks are not renewing credit if companies are not aligned with ESG.
• The great resignation is creating waves in the "equal pay, equal opportunity" movement.
• Strategic and governance alignment of materiality to action is crucial as leaders are starting to get paid by it.
• A playbook for rapid ESG implementation for companies is needed.
• Rapid risk evaluation for data flow for board of directors' insights is essential.
• Startups need to be ready for IPO as EU and future US mandates require reporting.

United States Insights:

1. California requires companies with $1 billion in revenue to disclose GHG emissions by 2024.

APAC Insights:

• China, India, and Singapore have disclosure plans.

Conclusion:

• Regulation in the UK and EU is still in flux.
• There is potential for external consultant work rather than an internal full-time Sapphire resource.
• Wait to solidify regulation before offering internal services at Sapphire for companies.
• The EU taxonomy application will apply to some startups already. Sapphire needs to monitor this requirement closely as soon as it becomes a rule.
• Large companies need solutions and software to manage these regulations.

References

1. EU Taxonomy for Sustainable Activities
2. WilmerHale ESG Insights
3. SPG Global ESG Insights
4. Brookings US vs EU Regulation
5. 26th Annual Conference on Financial Reporting at UC Berkeley
6. PwC Net Zero Report
7. The Recursive: ESG Strategy for Startups
8. Vestbee on ESG and Venture Capital

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