EU SUSTAINABLE FINANCE TAXONOMY CASE STUDY - APPLICATION, EXPERIENCE AND RECOMMENDATIONS - ENBW
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Table of contents About this report 3 Forewords 4 Management summary 6 1. An overview of the development of (sustainability) reporting 7 1.1. Important developments relating to the requirements for (sustainability) reporting 1.2 The development of EnBW reporting 2. Objectives, background and elements of the EU taxonomy reporting requirements 13 2.1 EU taxonomy objectives and background 2.2 Taxonomy-related reporting requirements for companies operating in the real economy 2.3 Definitions of the terms revenue, capex and opex 3. Practical implementation of the EU taxonomy at EnBW 20 3.1 Project plan and project organization 3.2 Defining the taxonomy-compliant activities 3.3 Establishing environmentally sustainable revenues, capex and opex 3.4 Findings from the first-time reporting of the EU taxonomy 4. Recommendations for finalizing the EU taxonomy 31 Appendix: Important documents 34 Contact / imprint 35 Table of contents 2
About this report As part of its climate policy positioning, the European experts (beyond the Sustainability department). In Commission presented the European Green Deal addition, presentation options for reporting in line in December 2019 following the Paris Agreement with taxonomy guidelines are analyzed together with in 2015. With the Green Deal, the European Com- matters relating to the generation of the information. mission’s declared aim is to reduce net greenhouse The document will also examine how the EU taxonomy gas emissions to zero by 2050 and thus become cli- should be developed further in terms of content and mate-neutral. The idea is to redirect capital flows into methodology against the backdrop of the objectives environmentally sustainable activities to support the pursued with it by the EU. objectives and financing of the Green Deal. To this end, the EU sustainable finance taxonomy (hereinaf- By presenting the results of the taxonomy implemen- ter: EU taxonomy) has been developed, a classification tation project, EnBW and Deloitte wish to contribute system used to clearly define “environmentally sus- to an informative finalization and interpretation of tainable” business activities. taxonomy-related reporting requirements. In the summer of 2020, work began on examining the The new reporting requirements associated with required information on the basis of the above-men- the EU taxonomy are likely to significantly increase tioned Regulation and the delegated act. In addition, the informative value of non-financial reporting by data on environmentally sustainable adjusted EBITDA establishing a link between financial and non-finan- was ascertained. The corresponding information was cial matters for the first time. They will be relevant included in the management report in the EnBW Inte- to the capital market for meeting its own reporting grated Annual Report 2020. The management report requirements and call for careful examination at an was audited as part of the statutory audit with reason- early stage within the companies that are subject to able assurance by Ernst & Young GmbH Wirtschafts- reporting requirements. The first reporting require- prüfungsgesellschaft. ment comes into effect on 1 January 2022, relatively soon after the Taxonomy Regulation was passed in The recording of relevant taxonomy-compliant EnBW June 2020. Some of the required criteria need further business activities is taking place in two phases. explanation, others have not yet been finalized. For the first phase, which provides the basis for this report and the taxonomy reporting in EnBW’s 2020 This publication is designed to classify the require- Integrated Annual Report, EnBW business activities ments of the EU taxonomy in the context of further in the Renewable Energies and Grids segments were developing financial and sustainability reporting from analyzed. In the second stage, information on the the perspective of a reporting company. The focus is taxonomy compliance of other Group activities will be on the early application of the EU taxonomy require- gathered in 2021. ments and their interpretation to produce information on environmentally sustainable revenue, capex and The introduction of the EU taxonomy should make an opex based on the Taxonomy Regulation of 18 June important contribution to transparency in relation to 2020 and the technical screening criteria in the draft the capital allocation envisaged by the EU in order delegated act concerning the Taxonomy Regulation to achieve a climate-neutral economy, provided that dated 20 November 2020 (see EnBW’s Integrated future delegated acts contain clear and ambitious Annual Report 2020, p. 79 ff.) The perspective of a criteria that not only reflect the objective of a cli- company operating in the real economy (the report mate-neutral economy in 2050, but, above all, set out author's view) is adopted for the purposes of present- a path towards achieving this overriding objective and ing and interpreting the requirements relating to the provide incentives for pursuing it. implementation of the EU taxonomy. Furthermore, the document is aimed at all stakeholders in the sus- tainable finance community (besides report authors, also standard setters, investors, policymakers, civil society, etc.) It will be shown under which conditions the implementation of the EU Taxonomy Regula- tion is both sensible and possible, but also requires sufficient lead time and the involvement of internal About this report 3
Dear Madam or Sir, The European Commission set a clear target following the announcement of the Green Deal: Europe should become the first climate-neutral continent by 2050. This represents a central pillar in terms of the imple- mentation of the Paris Agreement. The achievement of climate neutrality and the path towards it is one of the most important economic policy issues that com- panies currently need to respond to. As an important tool, the EU Action Plan on Financing Sustainable Growth calls for the creation of a classi- fication system for sustainable economic activities – the EU taxonomy. That is because clear standards and tools are needed, especially among investors on the financial markets, in order to enable the assessment of sustainability based on objective criteria. In line with the taxonomy guidelines, performance indica- ness reporting activities this year – before the official tors linking the financial and non-financial aspects of reporting requirement date – to include parts of the business reporting are now set to be published for the future mandatory taxonomy information. We had first time. As a member of the TEG, we have actively originally assumed that the major criteria would be supported the development of the EU taxonomy. in place by the time this report was finalized. This is not yet the case. As a first step, we have therefore In our view, it is essential for the successful imple- restricted ourselves to activities that are highly likely mentation of the taxonomy that attention is paid to to be classified as “environmentally sustainable”. what is technically possible and economically feasible These cover electricity generation from wind, PV and at the present time when establishing the specific hydropower as well as the electricity grids. criteria and threshold values. Maximum requirements as currently being discussed are not helpful to the With this report, we wish to contribute to the further transformation process. practical structuring of the EU taxonomy. We firmly believe that this tool will make an important contri- As a company, we have adopted a clear position: We bution to the successful implementation of the EU want to be climate-neutral by the end of 2035. On Green Deal. our way to achieving this aim, we will measure every investment against sustainability criteria, thereby Best regards, inextricably linking our future growth to it. We took the step to firmly root sustainability in our DNA at an early stage. We are among the pioneers of integrated business reporting and have been committed to national and international initiatives on climate risk Thomas Kusterer reporting and sustainable financing for a number of EnBW Chief Financial Officer years. In line with our sustainable corporate strategy, we have taken a decision to expand our integrated busi- Foreword 4
Dear Madam or Sir, Sustainability means future viability: Changing stake- holder expectations relating to the role played by companies in society mean that sustainable compa- nies can achieve competitive advantages in the sales and human resources markets as well as through innovations to seize new market opportunities and cut costs over entire life cycles. On the procurement market, companies are increasingly expected to take responsibility for environmental protection, occu- pational health and safety and human rights in the supply chain. Regulatory measures aimed at miti- gating climate change and facilitating the transition to a circular economy, for example, will have a signif- icant impact on the business models of many com- panies. Companies that fail to keep abreast of this profound change run the risk of being overtaken and companies concerned: Besides sustainability experts, left behind by their competitors. the departments responsible for the reporting sys- tems (particularly Accounting, Risk Management and Against this backdrop, it is clear why sustainability Controlling) must be involved at an early stage. is now also emphatically demanded by the capital market. Sustainability is relevant to value and has a This case study shares initial valuable practical expe- direct impact on cash flows, useful lives and capital rience with you to enable an informative yet realistic costs. Management boards and investors require implementation of the new requirements as well as reliable information as a basis for investment deci- recommendations for their finalization. sions. It is important to be able to reliably identify informative, strategically relevant indicators and Best regards, show their impact on the economic situation. Risk management, reporting and controlling systems must be must be enhanced accordingly. These developments are also reflected in the guide- lines for external reporting. Significant develop- Prof. Frank Beine ments to date have been the International Integrated Managing Partner Deloitte | Audit & Assurance Reporting Framework, the TCFD recommendations and the development of industry-related SASB stan- dards. The new taxonomy reporting requirements on “environmentally sustainable” revenue, capex and opex are likely to increase the informative value and comparability of reporting by mandatorily linking sustainability and financial reporting for the first time. They will be relevant to the capital market, as a basis for investment decisions, but also for meeting investors' own reporting obligations. The proper implementation of these requirements calls for a careful examination process within the Foreword 5
Management summary • Companies that are required to publish a non-fi- today. Taxonomy-compliant capex gives an indica- nancial report (§§ 289b ff., 315b f. German Com- tion of how a company is adapting to a decarbonized mercial Code (HGB)) must provide information on economy in 2050. An examination of capex, in par- “environmentally sustainable” revenues, invest- ticular, could thus be paramount for evaluating the ments (capex) and operating expenses (opex) for future viability of a company. the first time in 2021 in accordance with the EU • The need to include reporting requirements for Taxonomy Regulation. environmentally sustainable opex should be jus- • The new reporting requirements associated with tified or, alternatively, deleted, because the added the EU taxonomy are likely to significantly increase value in content terms is not clear to the majority of the informative value and comparability of non-fi- sectors up to now. nancial reporting. As a result of this reporting • To enable companies to realistically implement the requirement, financial and non-financial informa- taxonomy requirements, standard reference values tion is being mandatorily linked for the first time. for life cycle emissions should be established as far • Companies should allow sufficient time to imple- as possible, rather than requiring them to analyze ment taxonomy reporting requirements. Particu- individual plants. larly, the initial work associated with determining • Taxonomy compliance demands, among other taxonomy-compliant activities and deriving the things, that no significant harm (rather than harm taxonomy performance indicators subject to report- of any kind) is done to other EU environmental ing requirements (revenue, capex and opex) for the objectives. It has been possible to make reference 2021 reporting year will represent a considerable to compliance with demanding national and Euro- challenge for companies. pean legislation within the project, because high • The taxonomy implementation project comprises a environmental protection standards apply to the specialist and system-side component: energy sector. We assume that compliance with (1) A ssessing the environmental sustainability of these standards will generally exclude the possibil- activities, including identifying relevant activities, ity of any significant harm being done to the envi- evaluating their compliance with the taxonomy, ronmental objectives. gathering evidence, etc. • Environmental impact assessment (EIA) require- (2) T ranslating the sustainability assessment into ments should be adapted because it is conceivable financial performance indicators, including that there are cases where no EIA has (permissibly) taking stock of systems and processes for the been conducted, but it can nonetheless be proven respective internal data acquisition of taxono- that there is no risk of significant harm to EU envi- my-compliant performance indicators for each ronmental objectives. business activity. • The current threshold value of 100 g CO2e/kWh • The required taxonomy performance indicators for could act as a disincentive, hampering investment the wind, solar/PV, hydropower and electricity grid in activities (such as gas power plants) that are economic activities were ascertained for the 2020 essential for the transition to a decarbonized econ- reporting year. In addition, the adjusted EBITDA omy. performance indicator, which is relevant to EnBW, • The inclusion of transitional activities with ambi- was determined. tious but realistic threshold values would help to • Taxonomy-compliant revenue gives an indication significantly accelerate progress along this neces- of how “environmentally sustainable” a company is sary decarbonization path in the short and medium term. • For a final assessment of the practical reporting, auditing and utilization of taxonomy-related infor- Environmentally sustainable revenue, opex, capex mation, the announced delegated act specifying and adjusted EBITDA of the EnBW Group for the 2020 the reporting requirements is crucial. The current financial year considerations propose an unjustified granularity of the information by requiring that information is pro- 2020 2019 vided for each activity, environmental objective and Revenue 18% 15% many other criteria. • If the taxonomy is to be successfully implemented, Opex 26% 24% it is essential that attention is paid to what is tech- Capex 60% 66% nically possible and economically feasible at the Adjusted EBITDA 65% 59% present time when establishing the screening crite- ria and threshold values. Summary 6
1. An overview of the development of (sustainability) reporting 1.1 Important developments relating to the requirements for (sustainability) reporting 1.2 The development of EnBW reporting
1.1. I mportant developments relating to Financial Disclosures (TCFD), the information to be the requirements for integrated in the financial reporting on the oppor- tunities and risks of climate change for a company, (sustainability) reporting with a clearer emphasis on integrated corporate governance than in the other important reporting Since its launch at the turn of the millennium, the standards) and the SASB standards (industry-spe- Global Reporting Initiative (GRI) has become an cific sustainability information for integration in the increasingly recognized standard for the (voluntary) financial reporting). Other initiatives for enabling the reporting of the environmental, social and economic impact to be measured and monetized build on these. impact of a company’s business activities. The devel- opment of the GRI standards put the highly regarded Due to the passing of the NFRD (2014/95/EU) and its yet still very general reporting principles of the United adoption in national law (particularly in sections Nations Global Compact into concrete terms. By the 289b ff., 315b f. HGB through the German CSR Direc- time the GRI G3 reporting guidelines had been pub- tive Implementation Act (CSR-Richtlinie-Umsetzu- lished in 2006, the GRI standards had been adopted ngsgesetz or CSR-RUG)), sustainability aspects have by major international companies in particular. Since become more comprehensive. There is an explicit the 2005 financial year, non-financial performance requirement to include them in the management indicators, such as information on environmental and report (the information can also be published outside employee-related matters, must be included in this the management report in a separate non-financial context (§§ 289(3)(315)(1)(4), German Commercial report). Since the 2017 financial year, capital mar- Code (Handelsgesetzbuch or HGB)). ket-oriented companies with more than 500 employ- ees are thus required to add a non-financial state- The founding of the International Integrated Report- ment to their (consolidated) management reports. ing Council (IIRC) for the purposes of developing This must include information on environmental, integrated reporting (IR) was a key driver in the devel- social and employee-related matters and details opment and consolidation of financial and non-fi- relating to respect for human rights and measures nancial reporting. This includes integrated corporate to combat corruption and bribery if such information governance and the preparation of an integrated is needed to understand the business performance, report. From the very start, the focus has been on the business results and situation as well as the impact. companies’ overall value added. Accordingly, beyond the economic situation, a more broadly defined The new taxonomy reporting requirement ties in with meaning of the term capital has been assumed, one this reporting requirement. Accordingly, companies that not only examines financial capital, but also that operate in the real economy and are required to production-based, intellectual, human, social, net- publish non-financial reports in line with commercial work-based and natural capital – particularly the law must include information on “environmentally interaction between them. sustainable” revenue, capex and opex in financial years for which a report is prepared on or after The overwhelming emphasis on the past in conven- 1 January 2022 in compliance with the EU Taxonomy tional financial reporting should be replaced by a Regulation. As a result of this reporting requirement, short-, medium- and long-term examination of value financial and non-financial information is being added so that the report conveys the company man- mandatorily linked for the first time. The information agement’s strategic focus. The integrated reporting provides the basis for meeting the reporting require- should be market-driven, in contrast to a legally reg- ments of financial institutions (pursuant to the EU ulated report. Furthermore, no specific performance Disclosure Regulation 2019/2088) and therefore one indicators should be required. Instead, in line with of the reasons why it is highly relevant for investors. the strategic focus, companies should state the areas they consider to be essential to the value added and When the EU NFRD was passed back in 2014, an how they will quantify and report on them. announcement was already made that a revision of the Directive should be expected based on analyses The framework concept of IR has played a key role of the practical implementation of reporting require- in shaping the development of companies’ reporting ments against the backdrop of the objectives pur- activities, especially the most important frameworks sued by the EU. Following extensive consultations, currently used, which are the EU CSR Directive (offi- this revision has been announced for the year 2021. cially known as the Non-Financial Reporting Direc- In Germany, the Sustainable Finance Committee of tive, or NFRD, primarily implemented in Germany the Federal Government, the ASCG and the German through sections 289b ff., 315b f. HGB), the recom- Environment Agency, among others, have conducted mendations of the Task Force on Climate-related relevant analyses. 1. An overview of the development of (sustainability) reporting 8
Initiatives / milestones 2006 Global Reporting Initiative (GRI) Publication of the G3 guidelines for (voluntary) sustainability reporting 2013 International Integrated Reporting Council (IIRC) A framework concept for integrated reporting is published 2015 Sustainable Development Goals (SDGs) Paris Agreement The United Nations establishes 17 goals Global framework for combating climate change for socially, environmentally and eco- nomically sustainable development by 2030 2017 CSR Directive Implementation Act (CSR-RUG) Task Force on Climate-related Financial Companies of a certain size are required to incor- Disclosures (TCFD) porate sustainability information in their manage- Recommendations on taking into account the ment reports opportunities and risks of climate change in gover- nance, strategy, risk management and reporting. Thomas Kusterer is a member of the task force 2018 EU Financing Sustainable Growth Action Plan EU Technical Expert Group (TEG) on Sustainable The sustainable finance taxonomy is at the heart Finance of a total of ten overriding measures aimed at Proposals for crucial elements of the action redirecting private capital flows into sustainable plan. Thomas Kusterer is on the panel of experts investments, also with the aim of achieving the goals of the Paris Agreement 2020 EU sustainable finance taxonomy EU Platform on Sustainable Finance The Taxonomy Regulation is passed, establishing a EU Commission advised on the further development of the reporting requirement for companies operating in EU taxonomy (including technical screening criteria) the real economy with effect from the 2022 finan- cial year 2021 The Sustainable Finance Committee of the Federal Government 2023 The final report “Shifting the Trillions” includes detailed recommendations for the ongoing development of (non-financial) reporting. Dr. “CSR-RUG2” first used Lothar Rieth was co-leader, Announced: Companies are required for the first time Dr. Matthias Schmidt associate member to apply the revised requirements, as incorporated in 202X of the working group the German Commercial Code (HGB), in their non-fi- nancial reporting in line with commercial law Non-Financial Reporting Standards A requirement to use (global or European) non-financial reporting standards (initiatives of EFRAG and IFRS Foundation) 1. An overview of the development of (sustainability) reporting 9
All analyses reveal the following need for further Reliability: progress, especially from the perspective of the • Requirement to audit content report recipients: • Clarification of governance requirements, espe- cially requirements for management boards and • Materiality: Too much non-essential information supervisory boards vis-à-vis reporting systems and is (permissibly) provided. There is no reporting internal control systems for non-financial reporting requirement for some types of relevant information along the lines of financial reporting. – relating to longer-term development, for exam- But also taking into consideration sustainability ple. aspects in compliance and risk management sys- • Comparability: The reporting is largely qualitative tems. in nature. Quantitative information is often not comparable in the absence of standardization. After finalizing the Directive at EU level and enact- • Availability: There are numerous ways of disclosing ing it in national law (in accordance with predefined non-financial information; at the same time, the approaches, including draft consultations), it is circle of companies that are subject to reporting expected that the revised requirements will have to requirements is limited. be applied for the first time for the 2023 financial • Reliability: Considerable reservations concerning year. By widening the circle of companies that are the recording, processing, availability and quality subject to reporting requirements, more companies of the data, especially when compared to financial would be required to publish information on taxono- information. my-compliant revenues, capital expenditures (capex) and operational expenditures (opex). The following amendments are being discussed for the draft consultation of the revised EU CSR Directive It is becoming apparent that investors and regulators (NFRD2): expect non-financial reporting quality to be brought closer to that of financial reporting in a timely man- Materiality: ner, e.g. in terms of the clarity and unambiguity of • Clarification of “double materiality”: Relevant reporting requirements, but also in terms of what is impact alone is sufficient for the reporting require- required from the management boards to guarantee ment, without taking into account the economic full and accurate reporting as well as in terms of relevance. (Proposal by the Sustainable Finance content-based auditing. Due to their level of ambi- Committee relating to section 289c(3)(1) HGB: “as tion, the taxonomy reporting requirements are being well as” replaced by “or”). carefully discussed, particularly among those com- • Barriers lowered for risks for which there is a panies that are subject to reporting requirements – reporting requirement and the forecasting horizon but they tend to provide an indication of the direction extended (DRS 20 (Group Management Report): in which non-financial reporting will develop in the generally one year); potentially mandatory scenario future. analyses in keeping with the recommendations of the Index for the Task Force on Climate-related Financial Disclosures (TCFD). Comparability: • Development of non-financial reporting standards: Disclosure of specific and, if necessary, sector-spe- cific performance indicators (particularly initiatives by EFRAG and the IFRS Foundation). Availability: • Increase in the number of companies that are sub- ject to reporting requirements • Integrated reporting (in the management report) • Virtual raw database for the public disclosure of non-financial performance indicators that are sub- ject to reporting requirements 1. An overview of the development of (sustainability) reporting 10
Development of taxonomy guidelines and effects on EnBW reporting Passing of the EU Taxonomy Regulation: The reporting requirement is immediately effective; there is no need to enact it in German law. 18.06.2020 › The Taxonomy Regulation requires companies that must Requirement: Identify “environmentally sustainable” busi- prepare a non-financial statement to provide information ness activities. on “environmentally sustainable” revenue, capex and opex in the future. “Environmentally sustainable” activities are Corresponding data acquisition to ensure proper reporting. those that make a substantial contribution to one of the six EU environmental objectives. Delegated act with technical screening criteria Required reporting elements for the 2021 financial year: for the EU environmental objectives: Revenue, capex and opex connected to activities that make › Approval of the delegated act on the a substantial contribution to the achievement of objectives structure of the Taxonomy Regulation: 1 and 2 and do no significant harm to the achievement of 1. Climate change mitigation further environmental and social objectives. 2. Climate change adaptation Announced: 31.12.2020 Analyze related project activities initially based on the draft Expected: Q2/2021 consultation for the criteria. Delegated act to establish the new Establishing the reporting requirements: reporting requirements: › Determining revenues, capex and opex, among other things, Announced: 01.06.2021 together with their presentation in tabular form and other (Art. 8(4) Taxonomy Regulation) required explanations. Guidance is taken from the ESMA draft consultation from Q4/2020 and the final report from Q1/2021 in this regard. Delegated act with technical screening criteria for the Required reporting elements for the 2022 financial year: EU environmental objectives: Revenue, capex and opex connected to activities that make Formulation of EU environmental objectives 3–6. a substantial contribution to the achievement of objectives › 3. Sustainable use and protection of water and marine 1 to 6 and do no significant harm to the achievement of resources further environmental and social objectives. 4. Transition to a circular economy 5. Pollution prevention and control Further analysis of business activities vis-à-vis taxonomy 6. Protection and restoration of biodiversity compliance for environmental objectives 3 to 6. and ecosystems Announced: 31.12.2021 1. An overview of the development of (sustainability) reporting 11
1.2 The continuous development of EnBW annual reporting Integrated reporting, which takes into consideration the environmental and social aspects as well as the economic aspect, has played an important role at EnBW for a number of years. With a separate sustainability report having been published up until 2011, the changing information needs of the stakeholders led to the classic, two-part financial and sustainability reporting at EnBW being gradually replaced by integrated report- ing in recent years. Starting in 2012, the company initially published a combined report, which then became an Integrated Annual Report (IAR) in 2014 and has since been continuously developed and enhanced by adding both voluntary and binding reporting elements. Within the Integrated Annual Report, the management report shows all the essential information that is critical to the analysis of EnBW’s business performance, business result and situation over the past financial year. The management report in the EnBW Integrated Annual Report is audited with reasonable assurance. 2013 A clear stakeholder focus and a 2014 growing need for integrated thinking First integrated report based on the within the company. Publication of 13 recommendations of the International 2012 key performance indicators and their Integrated Reporting Council (IIRC). First combined report: targets for 2020. Financial and sustainability reporting merged with due regard to the requirements Integr ierter 2015 Ohne Gesch First complete examination of äftsbe An Bericht 2 Erkläru hang und oh of the Global Reporting Ini- richt 2 ng zur ne Unter 014 nehm 017 ensfü resources within the business hrung tiative (GRI) and the German Energiewe nde. Siche Sustainability Code (GSC). r. Machen . model: finances, relation- ships, employees, environ- ment, infrastructure, exper- 17 tise. richt 20 häftsbe Bericht r Gesc 2013 › rte wende. Integrie Energie 201230 Sicher. . Machen EnBW 2020 2016 Auf Ku Communication and integration of Further development of how the content relating to the sustain- Integrierter Str rs ategie interdependencies are pre- sented and the inclusion of able corporate strategy with a focus 2020 Geschäftsbericht 2020 on climate neutrality, voluntary Ohne Anhang und ohne Erklärung zur Unternehmensführung important new non-financial inclusion of the initial content from Fassung ohne Anha key performance indicators on ng the EU Taxonomy Regulation, based climate protection and corpo- on the Taxonomy Regulation (ver- AMBITION rate reputation. Further har- sion dated 18 June 2020) and monization of non-financial screening criteria (draft version of Kurzfa ssung and financial performance the delegated act dated 20 Novem- indicators. ber 2020). 2017 First presentation of climate-related risks based on the recommendations of the Index 2019 for the Task Force on Climate-related Communication of the targets for Financial Disclosures (TCFD) and presenta- financial and non-financial key 2018/2019 tion of the robustness of the business model performance indicators for the Further development of EnBW’s vis-à-vis climate protection. First reporting year 2025 (with simultaneous strategy (2025) to become a sus- based on the requirements of the CSR pursuing of the targets for the tainable and innovative infrastruc- Directive Implementation Act (CSR-RUG). year 2020). ture partner, governance consolida- tion: Anchoring sustainability Full presentation of the non-financial state- objectives in the investment pro- ment. cess and further developing the materiality analysis process, first reporting on green bonds. www.enbw.com/report2020 1. An overview of the development of (sustainability) reporting 12
2. Objectives, background and elements of the EU taxonomy reporting requirements 2.1 EU taxonomy objectives and background 2.2 Taxonomy-related reporting requirements for compa- nies operating in the real economy 2.3 Definition of the terms revenue, capex and opex
2. Objectives, background and elements of the EU taxonomy reporting requirements the EU Commission). The trade in emission allow- 2.1 EU taxonomy objectives and ances could also be extended to other sectors. Other background measures – in relation to emission threshold values, the circular economy and environmental standards, Having signed up to the Paris Agreement in 2015, among other things – concern i.a. the mobility, food the international community is committed to limiting production and chemical industries. To finance the global warming in the 21st century to well below 2°C measures, 30 percent of a package worth 1.8 tril- – preferably to 1.5°C. To this end, there is a drive to lion euros from the EU budget (2021–2027) and the cut global CO2 emissions by 80–95 percent by 2050, EU stimulus package (“NextGenerationEU”), will go resulting in extensive decarbonization of the global towards mitigating climate change. With funding of economy. 672.5 billion euros, the biggest program among the EU stimulus package must reserve 37 percent of The achievement of these climate objectives (in addi- this amount for climate projects. In addition, private tion to other sustainability targets) is being closely capital flows of between 180 and 290 billion euros monitored at EU level through the European Green per year are set to be redirected towards sustainable Deal and the EU Financing Sustainable Growth investments and projects. The following six envi- Action Plan: Europe is set to be climate-neutral by ronmental objectives are pursued in the Taxonomy 2050. Greenhouse gas emissions must be 55 percent Regulation. lower by 2030 than they were in 1990 (subject to final agreement between the European Parliament and 1. Climate change mitigation 2. Climate change adaptation 3. Sustainable use and protection of water and marine resources 4. Transition to a circular economy 5. Pollution prevention and control 6. Protection and restoration of biodiversity and ecosystems 2. Objectives, background and elements of the EU taxonomy reporting requirements 14
The increased level of transparency brought about by not “environmentally sustainable” as understood by the EU taxonomy in relation to “environmentally sus- the EU taxonomy because e.g. a) they do not meet the tainable” business activities represents a key tool for criteria or b) there are currently no criteria available achieving the EU objectives. The EU taxonomy forms at all, are “not sustainable” or even “not viable for the a sufficiently detailed and distinct catalog of criteria future”. for this purpose. Further measures involve low-car- bon benchmarks, EU standards for green bonds (EU In June 2018, a Technical Expert Group on Sustainable Green Bond Standard) and an EU Ecolabel for sus- Finance (TEG) was appointed to draw up specific rec- tainable financial products. ommendations. Among other things, its task was to develop a concept for a sustainable finance taxonomy, The classification of which economic activities are incl. proposals for taxonomy criteria. The focus of the considered to be “environmentally sustainable” is TEG was on the development of criteria for environ- especially intended to provide security for investors mental objectives 1 and 2 – climate change mitigation and prevent greenwashing. There has also been a and climate change adaptation. Once the TEG had debate as to whether “green” as well as “grey” and fulfilled its brief in the fall of 2020, it was replaced by “brown” activities should or even can be clearly dis- the Platform on Sustainable Finance in October 2020. tinguished from one another. A decision has been Building on the work of the TEG, its task, among other taken to avoid doing this for the time being. As such, things, is to help the European Commission to devise only those activities that make a substantial contri- the taxonomy criteria for the remaining four environ- bution to aspects such as climate change mitigation mental objectives and expand the scope of the taxon- (often referred to as “dark green activities”) are cur- omy to include social objectives. rently identified as green by the taxonomy criteria. Conversely, this does not mean that activities that are EU Technical Expert Group on Platform on Sustainable Finance: Sustainable Finances (TEG): The TEG's task was to help the European Com- This has replaced the Technical Expert Group on mission to devise the following elements: Sustainable Finance and has an advisory role relating to the following aspects: • An EU classification system (EU taxonomy) to determine whether an economic activity is 1. The taxonomy, including the four environmen- “environmentally sustainable”; tal areas in addition to climate change mitiga- tion and climate change adaptation, • An EU Green Bond Standard; 2. The expansion of the taxonomy to include • Methods for EU climate benchmarks and dis- other sustainability objectives, such as social closure measures for benchmarks; and and non-sustainable activities and • Guidelines to improve the way in which compa- 3. A sustainable financial policy in the broader nies disclose climate-related information. sense. July 2018–September 2020 Since October 2020 2. Objectives, background and elements of the EU taxonomy reporting requirements 15
The EU taxonomy only covers (for the time being) Business activities are “environmentally sustainable” criteria for economic sectors and economic activities within the meaning of the Taxonomy Regulation if that have the potential to make a substantial contri- they: bution to the mitigation of and adaptation to climate change. The criteria for the rest of the environmen- (1) make a substantial contribution to the mitiga- tal objectives are now set to be worked out by the tion or adaptation of climate change, evidenced Platform on Sustainable Finance. For the objective by compliance with certain criteria (technical of climate change mitigation, sectors have been screening criteria) that are not part of the EU chosen that are responsible for 93.5 percent of direct Taxonomy Regulation, but feature in subordinate greenhouse gas emissions in the EU. These sectors delegated acts, currently include: (2) do no significant harm (DNSH) to the achievement • Agriculture and forestry of the four other EU environmental objectives • Certain industry branches (cement, aluminum, iron (equally described in the delegated acts) and and steel, chemicals) • Energy and water supply (3) comply with minimum safeguards for occupa- • Mobility, transport and logistics tional safety and human rights. • Information and communication technology • Real estate industry Activities that cumulatively fulfill these criteria are “environmentally sustainable” in the sense of the Taxonomy criteria have been submitted in draft form Taxonomy Regulation. As a result, the revenue, capex for the main activities of these sectors. It should be and opex associated with these activities must be assumed that criteria covering all business activities determined and reported. and the entire business portfolio are so far only avail- able for a small handful of companies. Substiantially Do no significant contribute to at harm to any of least one of the Comply with the other five six environmen- minimum safeguards environmental tal objectives objectives 2. Objectives, background and elements of the EU taxonomy reporting requirements 16
Discussions and empirical findings to date suggest 2.2. An overview of taxonomy-related that many companies may currently only achieve reporting requirements for single-digit or at most low double-digit figures when companies operating in the real stating their "environmentally sustainable" revenue, economy despite demonstrating a long-standing and serious commitment to sustainability. Even very good results in the sustainability ratings and rankings do not nec- The taxonomy reporting requirement is linked to the essarily go hand in hand with an above-average level requirement to prepare a non-financial report pur- of “environmentally sustainable” revenues and opex. suant to Articles 19a and 29a of the EU Accounting The question here for companies is whether they Directive (implemented in Germany in sections 289b voluntarily give their investors additional information, ff. and sections 315b HGB “CSR-RUG”); the corre- when similarly applying the taxonomy logic, on the sponding information is part of this non-financial future viability of non-taxonomy-compliant activities. report (Art. 8(1) Taxonomy Regulation). These articles There are known cases, for example, where compa- 19a and 29a have been incorporated in the Account- nies that are only able to rate a very low percentage ing Directive by the EU Non-Financial Reporting of their revenue as taxonomy-compliant intend to Directive (NFRD). These provisions are currently supplement their non-financial reporting by provid- being revised. ing additional information on CO2 savings that can be achieved with their products or on approaches to In the EU Commission’s view, the percentage of rev- decarbonizing production processes. enue, capital expenditures (capex) and operational expenditures (opex) that is to be considered "environ- It should be noted that the EU NFRD is currently mentally sustainable" as set out in the EU taxonomy being revised and a widening of the circle of com- (Art. 8(2) Taxonomy Regulation) should be stated panies that are subject to reporting requirements for the first time for financial years for which the is expected. Pursuant to the Taxonomy Regulation, corresponding report is prepared on or after these companies will then have to publish the infor- 1 January 2022 (Article 27(2)(a) Taxonomy Regula- mation in the future (most likely from the 2023 finan- tion). According to the taxonomy regulation, compa- cial year onwards). nies must disclose “environmentally sustainable” turnover, which refers to the term used in the EU Accounting Directive. As EnBW prepares financial .3 Definitions of the terms revenue, 2 statements in accordance with IFRS, the company capex and opex reports taxonomy-compliant revenues, which is the equivalent IFRS term. The terms revenue, capex and opex and their deri- vation are not defined in the Taxonomy Regulation. It The information must be audited by the Supervisory has been announced that a delegated act for the spe- Board as part of the non-financial reporting in line cific reporting requirements in the Taxonomy Regu- with commercial law and pursuant to section 171 lation will be adopted by 1 June 2021. The European of the German Stock Corporation Act (Aktiengesetz Commission had asked the ESMA to come up with or AktG). There is no requirement for an auditor to recommendations. The ESMA presented a corre- check the content in the course of performing the sponding draft consultation in November 2020 (par- statutory audit. Such assurance engagements of ticularly for the reporting obligations of companies non-financial reports according to sections 289b ff., operating in the real economy). In March 2021, the 315b f. HGB can be reasonable or limited assurance main findings from the consultation were published, engagements or - as in the case of EnBW reporting including recommendations for the EU Commission as an extension of the statutory audit (with reason- to draw up the delegated act. The recommendations able assurance). provide an initial point of reference for the delegated act to put into concrete terms the reporting require- The authoritative legal source is the Taxonomy ments that will be developed on this basis. The ESMA Regulation, which lays down the criteria for "envi- recommendations presented to the EU Commission ronmentally sustainable" business activities and the are detailed below and, in some cases, critically reporting requirements for the percentage of these ranked. The ESMA consultation paper from Novem- activities attributable to revenue, capex and opex. The ber 2020 has been taken into account in EnBW’s Regulation applies directly. Unlike a Directive (such reporting, although the reporting does not fully con- as the EU NFRD), it must not firstly be enacted in form to these proposals. national law (in the HGB, for example). 2. Objectives, background and elements of the EU taxonomy reporting requirements 17
The three performance indicators are to be deter- According to the ESMA recommendations, “envi- mined and published in accordance with the rules ronmentally sustainable” opex should include indi- applied in the financial statements: If the financial vidually attributable, non-capitalized expenses for statements are prepared in accordance with IFRS, research and development, building renovations, “environmentally sustainable” revenue, capex and short-term leasing, maintenance and repairs, and opex must also be determined in accordance with other operating expenses necessary for maintaining IFRS. If the financial statements are prepared in “environmentally sustainable” business activities. accordance with national law (in Germany: HGB), the Depreciation of long-term assets (non-current three performance indicators must be determined assets) required for this purpose are not mentioned on the basis of these guidelines. The latter may be in the ESMA recommendations. relevant if the circle of companies that are subject to reporting requirements is widened in the future to The information on environmentally sustainable include capital market-oriented companies (required revenues, capex and opex should be presented in to prepare their accounts in accordance with IFRS). standard table form together with supplementary This ESMA recommendation is to be welcomed, explanations. This should ensure that the basic because it was suggested in the TEG taxonomy report approach used to calculate the performance indi- that revenue should be calculated in accordance with cators, including any necessary assumptions, is the EU Accounting Directive and capex in accordance explained. The ESMA recommendations state that for with IFRS (no statement was made by the TEG the in every business activity relevant to the company that relation to opex at the time). is subject to reporting requirements the identification of the substantial contribution to one (or more) of Revenue should be viewed as taxonomy-compliant the EU environmental objectives, the assessment of under the following conditions: the DNSH criteria and the compliance with minimum safeguards. If an activity makes a substantial contri- • Principle: If the business activity makes a sub- bution to the achievement of several EU environmen- stantial contribution to the achievement of one tal objectives, it should be stated how double count- of the objectives, does no significant harm to the ing has been avoided, e.g. by providing breakdowns, achievement of the other objectives and complies including any underlying assumptions. For the three with minimum safeguards for employee and human performance indicators, the key drivers of change rights. in the reporting periods should be stated in each • Only in relation to EU environmental objective 2 case. The qualitative information should be located (climate change adaptation): If the business activity close to the three performance indicators. By way of enables the customer to adapt to climate change. exception, however, references are also permissible within the report. Figures for the previous year must According to the ESMA recommendations, capex be stated from the second reporting year onwards. should be calculated on a gross basis, i.e., without Information on targets or forecasts is not explicitly taking into account revaluations, scheduled depre- required. Such requirements may arise for German ciation or impairment losses. Capex should include companies, however, if the performance indicators investments in long-term tangible and intangible have to be viewed as relevant to the ongoing mana- assets (non-current assets). It should also include gement of the company within the meaning of goods that have been acquired as part of asset deals DRS 20.106. (capex immediately discernible) or share deals (capex calculated as part of the purchase price allocation). For capex to be deemed “environmentally sustain- able”, the expenses should further be incurred as part of a plan that leads to a taxonomy-compliant business activity within five years. The plan should be formally passed by the company management or agents acting on their behalf. 2. Objectives, background and elements of the EU taxonomy reporting requirements 18
The current status of the discussion and an initial on the interpretation of the terms, although company evaluation reporting systems should be examined at an early stage to determine whether they can present the Following an initial review, the ESMA recommenda- information required by the EU taxonomy. Adjust- tions to the EU Commission generally appear to be ments to the reporting systems may be necessary to clear and comprehensible. The ESMA recommenda- guarantee that the information is both complete and tions are not directly aimed at companies that are (in accurate. Here it appears advisable to make a start future) subject to reporting requirement, although on the systems used until now for recording revenue, EnBW has in principle been guided by them. How- capex and opex rather than upgrading the existing ever, a critical view must be taken of recommenda- data acquisition software for sustainability data, tions concerning the fact that the three performance unless they have been directly linked to the financial indicators must not only be stated at Group level – as reporting. required by Art. 8 (2) of the Taxonomy Regulation – but also The relevance and informative value of environmen- tally sustainable opex is debatable for internal and (1) for every single taxonomy-compliant activity of a external stakeholders. The need to include reporting company, requirements for environmentally sustainable opex (2) broken down into transitional or enabling activi- should be justified or alternatively deleted, because ties and the added value in content terms is not clear. (3) individually for each of the six EU environmental objectives. The taxonomy guidelines, for example, detail 25 tax- onomy-classified business activities for energy gen- eration alone. If energy generation companies have to state the three performance indicators for all six environmental objectives for these activities, includ- ing an aggregated Group view, that would result in 26x3x6=468 individual pieces of information, each needing to be supplemented by qualitative informa- tion. The value added provided by this level of detail is not discernible for the user of the data. If aggregated reporting at Group level is considered to be insuffi- ciently detailed, reporting at business segment level within the meaning of IFRS 8 (business segments) would be a practicable middle way in order to guar- antee consistency between the financial and non-fi- nancial reporting. It must be assumed that the required information is not currently available as standard in companies. In the case of corresponding profit center costings, the information can be determined in EnBW’s experience in accordance with cost-benefit considerations based 2. Objectives, background and elements of the EU taxonomy reporting requirements 19
3. Practical implementation of the EU taxonomy at EnBW 3.1 Project plan and project organization 3.2 Defining the taxonomy-compliant activities 3.3 Establishing environmentally sustainable revenues, capex and opex 3.4 Findings from the first-time reporting of the EU taxono- my
The following shares were d debate and deliver added value for internal segment: Energies and exter- 3.1 Project plan and project nal stakeholders. organization "Environmentally sustainable The reporting was based on the adjusted Taxonomy EBITDA Regulation from busine EnBW opted to incorporate key parts of the future from 18 June 2020 and the technical screening Energies segment crite- binding provisions from the Taxonomy Regulation ria set out in the draft delegated act on the Taxonomy in its integrated reporting before the EU taxonomy Regulation dated 20 November 2020, also taking into in € million reporting requirements come into force. The results account the ESMA consultation paper Revenue on reporting were first published in the 2020 Integrated Annual pursuant to Article 8(2) of the Taxonomy Regulation Report, which EnBW unveiled at the end of March dated 5 November 2020. In March Renewable 2021, theEnergies main segment 2021 at the press conference on annual results. The findings from the consultation wereofpublished, which "environmentally publication of the data and the experience gained including recommendations for thesustainable" EU Commission in € million / in % from the associated implementation project with to draw up the delegated act. Opex Deloitte should contribute to the sustainable finance Renewable Energies segment of which "environmentally Activities examined for the EU Taxonomy Regulation sustainable" in € million / in % Capex Examined segments Renewable Energies segment of which "environmentally sustainable" in € million / in % Sales Grids Renewable Generation Adjusted EBITDA Energies and Trading Renewable Energies segment of which "environmentally Examined activities: Examined activities: » Electricity distribution grids sustainable" in € million / in % » Onshore wind » Electricity transmission grids » Offshore wind Activities not examined: » Solar » Gas distribution grids » Hydropower For activities across the who » Gas transmission grids Activities not examined: » Grid services » Biomass were derived for the areas c » Water "Environmentally sustainable and adjusted EBITDA of the E in € million The following shares were derived for the Grids segment: Revenue "Environmentally sustainable" revenue, opex, capex and Group adjusted EBITDA from business activities in the Grids segment of which "environmentally sustainable" in € million / in % Environmental objectives: in € million 2020 2019 Opex 1. Climate change mitigation Revenue Substantial contribution to at least one Requirements: 1 environmental objective (substantial 2. Climate change adaptation contribution, currently to environmental Group • OECD Guidelines on Multinational Grids segment objectives 1 or 2). 3,658 3,460 Enterprises 3. Sustainable use and of which "environmentally protection of water and of which "environmentally • UN Guiding Principles on Business and marine resources Humansustainable" Rights in € million / in % sustainable" 2 in € million / in % 2.506 / 69 2.376 / 69 4. Transition to a circular • ILOCapex Declaration on Fundamental Rights Do no significant harm (DNSH) to any of the economy Opex other other EU environmental objectives at Work 5. Pollution prevention and Group Bill of Human Rights • International control Grids segment 1,122 1,039 • (intersect with NFRD, of which NAP human rights, "environmentally 6. Protection and restoration of of which "environmentally 3 supply chain legislation). sustainable" in € million / in % biodiversity and ecosystems sustainable" in € million Minimum/safeguards in % 692 / 62 623 / 60 Adjusted EBITDA Capex Group Grids segment 1,407 Share 1,231of “environmentally To be sustainable” economic activities of which "environmentally of which "environmentally disclosed: Revenue sustainable" inX% € million / in % sustainable" in € million / in % 975 / 69 778 / 63 Capex Y% Adjusted EBITDA Opex Z% Grids segment 1,347 1,355 3. Practical implementation of which of the EU taxonomy at EnBW "environmentally 21 sustainable" in € million / in % 987 / 73 960 / 71
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