EU Taxonomy Regulation: Compliance obligations and value creation from a Danish perspective
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EU Taxonomy Regulation: Compliance obligations and value creation from a Danish perspective

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Line Berg Madsen and Peter Hedegaard Madsen of Poul Schmith explore how the new reporting obligations under Article 8 of the EU taxonomy regulation presents both legal challenges and commercial opportunities from a Danish perspective

When the EU taxonomy regulation (the Taxonomy Regulation) was adopted in 2020, it introduced the first EU-wide regulatory framework to facilitate sustainable investment (See Regulation (EU) 2020/852 of the European Parliament and of the Council). Whereas the Taxonomy Regulation does not set thresholds for a certain minimum of sustainable economic activities or investments, the reporting obligations are aimed at creating transparency about the ratio of green’ (Taxonomy-aligned) versus grey (non-Taxonomy-aligned) activities and investments.

Starting from January 1 2022, large public-interest entities with more than 500 employees became subject to new reporting requirements pursuant to Article 8 of the Taxonomy Regulation (Cf. the definition in Articles 19a and 29a of Directive 2013/34/EU, as amended by the Directive 2014/95/EU). The disclosure of taxonomy-eligible economic activities characterises a new era of comprehensive, holistic environmental sustainability criteria, even though this year’s disclosure requirements are just a subset of what is to come. This has raised certain rather cumbersome challenges for the companies concerning, e.g. data availability and legal certainty about the specific requirements.

However, the knowledge gained in the process of preparing Taxonomy Regulation-disclosures may present commercial opportunities for sustainable value creation going forward. As companies begin to embed environmental sustainability – within the definitions of the Taxonomy Regulation – into their businesses, it becomes clear that having an overview of relevant economic activities and supporting data becomes a value proposition to customers, investors, and other stakeholders, rather than solely a compliance ‘tick the box’ exercise.

The application of the Taxonomy Regulation

Since the EU non-financial reporting directive (the ‘NFRD’) was adopted in 2014 and implemented across member states in the EU by 2018, certain large companies have been subject to requirements to publish non-financial statements disclosing the development, performance, position, and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters (Directive 2014/95/EU).

The largest Danish companies have been subject to national non-financial reporting requirements since 2009, and the current wording of the Danish Financial Statements Act Section 99a remains wider than the NFRD on certain points. However, the Taxonomy Regulation is currently solely implemented with respect to public-interest entities with more than 500 employees in line with the Taxonomy Regulation. This corresponds to the public-interest entities included in reporting class D in the Danish financial statements act. Conversely, this means that other non-public-interest entities in reporting class D have not become subject to the Taxonomy Regulation.

Under Danish law, a reference to the Taxonomy Regulation has been directly embedded in financial regulation, such as the Financial Business Act and the Securities Trading Act (Law No. 2382 of December 14 2021).

With the implementation of the Taxonomy Regulation – namely the reporting obligations in Article 8 – a new era of quantitative and qualitative reporting obligations has begun.

Starting from January 1 2022, companies in scope of Articles 19a or 29a of the NFRD became subject to an obligation to report on how and to what extent the company’s activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. Effectively, this applies to reporting of economic activities, that are eligible to becoming aligned with the Taxonomy Regulation under the environmental objectives of climate change mitigation or climate change adaptation.

The full exercise of reporting Taxonomy-aligned environmentally sustainable economic activities is now underway for non-financial public-interest companies, as these must report their Taxonomy-alignment ratio on each of the key performance indicators (KPIs) revenue, capital expenditures (CAPEX) and operational expenditures (OPEX) in 2023. Taxonomy-alignment ratios must be reported by financial companies in 2024.

These obligations must be read in conjunction with other parts of the Taxonomy Regulation and three delegated acts, that set out important clarifications:

  • The delegated regulation supplementing the disclosure requirements in Article 8 of the Taxonomy Regulation (the ‘Article 8 Delegated Act’) (Commission delegated regulation (EU) 2021/2178);

  • The delegated regulation establishing technical screening criteria for and “do no significant harm” criteria concerning climate change mitigation or climate change adaptation (the ‘Climate Delegated Act’) (Commission delegated regulation (EU) 2021/2139);

  • The complementary delegated act as regards economic activities in certain energy sectors (the ‘Energy Complementary Delegated Act’) (adopted on March 9 2022 but not published in the Official Journal at this point in time).

As there is a close correlation between the delegated acts and regulatory standards pertaining to, on the one hand, the Taxonomy Regulation, and, on the other hand, the regulation on sustainability‐related disclosures in the financial services sector (the SFRD), the European Commission is expected to issue a single delegated act, that bundles and harmonises the details of at least 13 delegated acts (Regulation (EU) 2019/2088; Information letter from the European Commission, dated November 25 2021).

As the NFRD will be revamped under the proposed Corporate Sustainability Reporting Directive (the CSRD) Commission proposal (COM (2021) 189), the ongoing, thorough development of reporting standards by the European Financial Reporting Advisory Group (EFRAG) is also expected to create harmonisation among the reporting rules.

Certain challenges and opportunities arise in the implementation.

Even though the terms used above have become part of the regulatory language used by Taxonomy Regulation practitioners during 2021 and 2022, it is clear, that this comprehensive sustainability and reporting scheme presents several challenges. We consider certain, selected observations below.

Environmentally sustainable economic activities

The four overarching conditions for economic activities, that qualify as environmentally sustainable, are set out at Article 3 of the Taxonomy Regulation:

  • The activity must make a substantial contribution to one or more of the six environmental objectives set out in Article 9 and further described in the Taxonomy Regulation’s Articles 10 to 15:

  • Climate change mitigation;

  • Climate change adaptation;

  • Sustainable use and protection of water and marine resources;

  • Transition to a circular economy;

  • Pollution prevention and control; or

  • Protection and restoration of biodiversity and ecosystems.

  • The activity must do no significant harm (“DNSH”) to any of the environmental objectives in accordance with the Taxonomy Regulation’s Article 17,

  • The activity must comply with the minimum safeguards laid down in in the Taxonomy Regulation’s Article 18, and

  • Compliance with the technical screening criteria for the relevant environmental objective pursuant to the Taxonomy Regulation’s Articles 10(3), 11(3), 12(2), 13(2), 14(2), and 15(2) must also be satisfied.

Environmental objectives

The first two environmental objectives climate change mitigation and climate change adaptation are described in the Climate Delegated Act and the Energy Complementary Delegated Act with respect to the economic activities, that have been defined by the EU regulators at this stage.

The Taxonomy Regulation supports implementation of the Paris Agreement and, notably, aims to strengthen the response to climate change by making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development (Cf. recital3 of the Taxonomy Regulation). As a result, the Climate Delegated Act covers the economic activities of roughly 40% of listed companies, in sectors which are responsible for almost 80% of direct greenhouse gas emissions in Europe (press release from the European Commission regarding the Climate Delegated Act. It includes sectors such as energy, forestry, manufacturing, transport and buildings.

Given certain public debate as to whether natural gas and nuclear energy could be environmentally sustainable economic activities in the longer term, the Energy Complementary Delegated Act came about later, on March 9 2022. Under strict conditions, specific nuclear and gas energy activities will be included in the list of Taxonomy-eligible economic activities as of January 1 2023 (Press Release from the European Commission regarding the Energy Complementary Delegated Act. This is to help accelerate the shift from solid or liquid fossil fuels, including coal, towards a climate-neutral future.

“Under strict conditions, specific nuclear and gas energy activities will be included in the list of Taxonomy-eligible economic activities as of January 1 2023”

These two delegated acts follow a common structure, whereby the respective economic activity is briefly described, followed by technical screening criteria and, finally, the DNSH-criteria for the economic activity.

For the purpose of reporting the Taxonomy-eligibility ratio of a company, an essential step is to identify which economic activities the company is engaged in. The exercise differs for non-financial companies, which must account for their own economic activities (revenue, CAPEX, and OPEX), and financial companies, which must identify the underlying economic activities, in which their assets are placed. Credit institutions shall also disclose respectively, trading portfolio and on demand inter-bank loans in their total assets, and insurance and re-insurance companies shall disclose both assets and economic activities.

In the Climate Delegated Act and the Energy Complementary Delegated Act, one or more NACE codes are described for each economic activity and these are often helpful for classifying whether an activity is Taxonomy-eligible. However, several cross-sectoral activities, such as infrastructure projects, and new or emerging technologies, for example Power-to-X technology, are not yet defined as such – while several aspects are included, such as electricity storage, transmission as well as manufacture of equipment for hydrogen and the manufacture of hydrogen itself. An analysis with a break-down into several relevant economic activities is often the solution.

At several places, the technical screening criteria refer to existing principles and standards. For example, reference is made to the widely recognised environmental management standards (ISO 14001 etc.) and the use of life cycle assessments (LCA).

Importantly, LCAs must be performed against best available technology as opposed to a comparison against mere traditional or conventional technologies. The use of LCAs is in line with the revamped guidelines issued by the Danish Consumer Ombudsman in December 2021 – and thereby supports one of the common objectives of the Taxonomy Regulation and the Danish Marketing Practices Act: Discouraging and disincentivising greenwashing.

Minimum safeguards

Compliance with minimum safeguards, set out in Article 18 of the Taxonomy Regulation, aims at economic activities that are aligned with OECD’s Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (the UN GP).

At present, EU regulators have not adopted specific standards for implementation of the OECD guidelines or the UN GP under the Taxonomy Regulation. Due to the pressing needs to address climate change issues and improve investments into this area, the Taxonomy Regulation and corresponding delegated acts were focused on environmental sustainability in first instance.

In February 2022, the Platform on Sustainable Finance, which is an advisory board subject to the Commission’s horizontal rules for expert groups, issued its ‘Final Report on Social Taxonomy’. The report sets out a proposed methodology for minimum safeguards, which largely follows the model of the environmental objectives: Selection of relevant sectors/economic activities; conditions for making a substantial contribution; and finally, criteria for doing no significant harm.

Simultaneously, the development of a corporate sustainability due diligence directive (the CSDD) is also moving forward in the EU. While the social taxonomy would be focused on economic activities and alignment with the Taxonomy Regulation, the proposed CSDD will set specific requirements for companies to foster sustainable and responsible corporate behaviour throughout global value chains (press release by the European Commission regarding the proposed CSDD).

Although the definition of minimum safeguards presents one of the first explicit requirements for companies respect human rights, it is important to note that existing social rights of EU workers, the objectives enshrined in EU treaties, the EU Charter of Fundamental Rights, and the conventions of the International Labour Organisation do serve the same underlying purpose of respecting human rights.

For many companies, this translates into inter alia decent work conditions in the form of training, wages, and respect for workers’ privacy. As an example, the global Covid-19 pandemic brought human rights, such as safe and healthy working conditions and access to healthcare, into a new light requiring urgent attention and ongoing monitoring, support, and flexibility.

A few of the benefits of a social taxonomy and the CSDD would, thus, be to obtain a clearer and more uniform way of linking human rights to economic activities and addressing how negative impacts can be reduced and positive impacts can be enhanced.

Revenue, CAPEX and OPEX

The Taxonomy-eligibility exercise requires companies to gain insight into the relevant economic activities covered by the Taxonomy Regulation.

The Taxonomy-alignment exercise will require a much more detailed insight into the ratio of revenue, CAPEX and OPEX, that can be attributed to economic activities satisfying the conditions of the Taxonomy Regulation.

Importantly, the CAPEX or OPEX, that is relevant under the Taxonomy Regulation does not correspond to the full scope of CAPEX or OPEX from an accounting perspective. In broad terms, the expenditures must be relevant to the transition to or conduct of an environmentally sustainable economic activity. For example, only Taxonomy-relevant training expenditures can be included pursuant to the current Article 8 Delegated Act, whereas other training expenditures are excluded from the Taxonomy-aligned OPEX and are, thus, ‘grey’ by nature.

For both non-financial companies and financial companies, some of which are investors in non-financial companies through external asset managers, this raises significant challenges with the level of detail needed to perform the Taxonomy-alignment calculations.

The aim of the Taxonomy Regulation is to incentivise companies to gain such insights and align their sustainable development with the business strategy of the company. Based on our experience, such insights can become a value add to the company and encompass actual value creation, once clarity, data, organisational governance, and proper procedures have been established. In the short term, immediate action towards the Taxonomy-alignment exercise is advised to achieve the best possible data quality, legal certainty, and accounting practices.

Competent authorities

Pursuant to Article 21 of the Taxonomy Regulation, the EU member states shall ensure that the competent authorities monitor financial companies’ compliance with the Taxonomy Regulation, including that the competent authorities shall have the necessary supervisory and investigatory powers to exercise their functions under the Taxonomy Regulation.

In Denmark, the competent authority concerning financial companies and listed companies is the Danish Financial Supervisory Authority. The Danish Financial Supervisory Authority (the “FSA”) has publicly declared on several occasions that their unit for sustainable finance will devote significant resources to the oversight and enforcement of the Taxonomy Regulation and the SFRD. Supposedly, the FSA aims at an enforcement unit of 20–30 full time employees (see


As outlined above, the Taxonomy Regulation sets out new obligations, that pose challenges in terms of inter alia:

  • Structural issues with classifying economic activities into those categories, that are relevant under the Climate Delegated Act or the Energy Complementary Delegated Act;

  • Data collection, structuring, validation, and governance to a sufficient and satisfying degree to meet the reporting obligations under Article 8 of the Taxonomy Regulation and the Article 8 Delegated Act;

  • Embedding the four conditions for environmental sustainability – including minimum safeguards – into financial and non-financial products and services, as certain criteria are simply not fully developed at this stage.

While many companies have yet to experience the full potential of the Taxonomy Regulation’s value-adding role, the steps that are taken to increase data quality and integration in the given company’s strategy, create transparency and data foundation, can be beneficial to the company.

Even companies, that are not subject to the Taxonomy Regulation or do not engage in Taxonomy-eligible activities, can help foster transparency for their customers, banks, or investors, by understanding how their company contribute to or even performs enabling activities (enabling activities are defined in Article 16 of the Taxonomy Regulation).

Some of the benefits that can help preserve or even create value are:

  • Provision of data to banks to enable green loans or ESG-linked facilities in line with the Taxonomy Regulation, which could save certain base points on interest rates;

  • Provision of data to existing or potential investors to enable their investments and reporting under the Taxonomy Regulation;

  • Qualification for requests for proposals or public tenders, that include technical criteria or human rights obligations in line with the Taxonomy Regulation;

  • Demonstration of ambitions for green transition, respect for human rights, and proper governance, which has proven to be of a historically high interest not least in the light of geopolitical developments and conflicts.

To achieve such benefits, certain steps must be taken – including but not limited to – this five-step plan, which has proven helpful to our clients:

  • Calculation of greenhouse gas emissions in line with recognised standards and frameworks, such as the Greenhouse Gas Protocol and the Task Force on Climate-related Financial Disclosures (TCFD);

  • Analysis of Taxonomy-eligibility economic activities and their Taxonomy-alignment with the four conditions of the Taxonomy Regulation, and calculation of the ratio within the relevant KPIs for financial and/or non-financial companies;

  • Analysis and due diligence of alignment with minimum safeguards – often carried out as a ‘human rights due diligence’ as a first step – and other ESG risks and impacts. The four conditions of environmentally sustainable economic activities correspond to fundamental elements of environmental, social and governance (ESG) matters – however, it is important to understand other aspects, that might not have been defined in the context of the Taxonomy Regulation;

  • Establishment of proper governance – involving, among other things, (i) organisational and leadership support (board of directors, executive management etc.); (ii) data collection, structuring, validation, and governance; (iii) integration of sustainability and responsible business conduct in the company strategy, products and services; and (iv) remuneration of the executive management to incentivise satisfying performance on ESG targets and ethical behaviour;

  • Consideration of impact of the CSRD, CSDD, SFRD, and other regulatory requirements, that are in effect already or expected to be within three years, as this new era of sustainable development and reporting requires a certain time frame for establishment, implementation across the value chain (suppliers, sub-contractors, customers etc.), and validation.

As the ramifications of the Taxonomy Regulation are far-reaching within a company’s organisation and across its value chain, this presents an obligation and opportunity for boards of directors to understand the specific implications and integrate ESG in the company’s strategy as a way to incentivise engagement and cultivate value creation.



Line Berg Madsen


Poul Schmith

T: +45 3160 5007


Line Berg Madsen is a partner at Poul Schmith, specialising in sustainability and ESG matters.

Line has 13 years of experience in advising, among others, private equity funds, other investors and a wide range of industrial companies as well as public companies on governance, compliance and sustainability matters. She has extensive subject matter knowledge within ESG matters and assists multiple clients with interpretation and implementation of the EU Sustainability Finance Disclosure Regulation and Taxonomy Regulation. Line’s background as in-house counsel, consultant and legal adviser has given her extensive experience in risk/impact assessments, compliance programmes, LegalTech solutions and legal aspects of ESG strategies.

Line holds a master’s degree in law from the University of Copenhagen and a Master 1 from the Paris Descartes University (Paris V).


Peter Hedegaard Madsen


Poul Schmith

T: +45 25100550


Peter Hedegaard Madsen is a highly esteemed specialist in corporate regulation. He holds a master’s degree in law from the University of Copenhagen, and an LLM (with distinction) in International Financial Law from King’s College London. Furthermore, he has completed Executive Board programmes from INSEAD and Copenhagen Business School, respectively.

Peter specialises and has more than 15 years of experience in advising large and highly regulated companies with particular focus on compliance and regulatory matters.

Peter advises a wide range of private and public-owned companies, and has designed and established several public investment funds, including the Danish Green Investment Fund, the Danish Growth Fund, the Recovery Fund, and the Future Investment Fund. In this regard, Peter advised on the application of the EU Taxonomy and the Sustainable Finance Framework. He is recognised by Legal 500 as “an expert in regulatory matters”.

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