Taxonomy usability – A common language for sustainability data
A shared interest in data requires a common language
Shared interests of EU member states, supervisors, investors, banks, research institutes and companies in sustainability data requires a common language with the possibility to exchange data in automated systems.
A common language for sustainability needs at least two structural elements: a sustainability taxonomy and a nomenclature or classification system. We have summarised this in Figure 1.
Figure 1. A common language for sustainability data: two structural elements. In order to identify a sustainable activity in automated systems the sustainability criteria on the left-hand side and “codes” on the right-hand side must be combined.
Taxonomies: EU Taxonomy, EU lists of environmental and energy efficient products and ecolabeling standards
The structural element on the left of Figure 1 is the sustainability content. These are technical criteria, tools and labels to identify sustainable activities, products, services or processes. When companies disclose the percentage of sustainable activities, they might refer to the EU Taxonomy but also to other sustainability standards for products or processes. The left-hand side of Figure 1 contains the two main ecolabeling standards ISO and ISEAL, the EU “list of cleaner and resource efficient products” (and the EU “list of energy efficient products”, as examples).
Nomenclature: economic classifications
The first structural element on the right-hand side of Figure 1 is the economic classification system. This is nothing else than a coherent numeric coding system to make automated exchange of data possible. An important part of it is the international system of economic classifications.
Investors and banks currently only use NACE codes or similar (ISIC, NAICS, GICS, etc.). NACE codes (up to 4-digit) are describing the activities of a company, but not the products or services.
Information on groups of products and services, coded via PRODCOM (8- to 10-digit) are collected by EU member states for production statistical purposes, but not yet made available for financial institutions.
Nomenclature: environmental classifications
On the right-hand side of the Nomenclature in Figure 1 there are also two environmental classifications: CEPA and CReMA and 7 environmental product classes. They are just classifications, thus codes, not criteria.
These additional environmental identifiers for economic activity are a necessary element in the Nomenclature in Figure 1 because product codes alone do not always distinguish between sustainable and non-sustainable products.
These environmental classifications are also part of the data requirements of the System of Environmental-Economic Accounts (SEEA) that EU member states use for their environmental-economic accounts.
Alignment between the Taxonomy and the Nomenclature is essential for its usability
Alignment between the EU Taxonomy and the Nomenclature improves the data quality and is essential for automated exchange of sustainability data.
As we summarised in the past, the usability of the taxonomy is dependent on actions carried out by both EU Legislators & Member States and Financial Market Participants. Both by themselves and in cooperation, as parties with shared interests, it is critical to ensure that classifications, disclosures, implementation, data and assessment of the taxonomy follow a coherent information chain as depicted in the graph below.
Template for non-financial disclosures by companies
The EU Member States already make an estimation of the proportion of environmental activities of companies for the Environmental-Economic Accounts. Different data sources are used, like administrative data, telephone calls and regular production surveys. Many companies provide data at a very detailed product level, using the PRODCOM codes. Adding further variables focusing on the sustainability of the products is very challenging, time and cost-intensive. It is important that the EU harmonizes requests for information, in order to reduce the administrative burden.
Table 2. Template for companies to disclose alignment with Taxonomy and percentage of sustainable revenues and expenses (in this example, one row is one company; companies have multiple rows for different product groups).