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Sustainability now: The EU Taxonomy Regulation gets simplified · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_03: Hello, I'm Heather Horn, PWC's U.S.
• 0:10
  SPEAKER_03: Sustainability Technical Leader, and welcome back to PWC's Accounting Podcast.
• 0:15
  SPEAKER_03: In today's episode, we're diving into the latest updates to the EU taxonomy regulation following the European Commission's July 4th adoption of amendments to the delegated acts.
• 0:25
  SPEAKER_03: To help walk through what's changed and what it means for both financial services and non-financial services companies, it's basically all companies in scope of the act.
• 0:34
  SPEAKER_03: I'm joined by Valerie Weeman, National Office Partner, who, among her other responsibilities, focuses on the EU taxonomy regulation.
• 0:42
  SPEAKER_03: Together, we'll cover the new provisions, key reliefs, and what companies can expect next.
• 0:47
  SPEAKER_03: Before we get started, though, just a couple quick notes.
• 0:50
  SPEAKER_03: If you're not already watching, but you'd like to, you'll find a link to the video in the show notes.
• 0:55
  SPEAKER_03: And for additional background on the EU taxonomy and other omnibus proposals, I encourage you to check out our prior episodes and resources, which are also linked in the show notes.
• 1:05
  SPEAKER_03: Okay, with that, we can get started.
• 1:07
  SPEAKER_03: Val, thanks for being here today.
• 1:09
  SPEAKER_03: So before we get into what's changed with the EU taxonomy regulation, can you just re-level set up for the audience what that regulation is and high level what disclosures that it requires?
• 1:20
  SPEAKER_01: Sure.
• 1:20
  SPEAKER_01: So the taxonomy regulation is another one of the regulations that came from the European Green Deal, which was, you know, only about five years old at this point.
• 1:29
  SPEAKER_01: So it did generate also the sustainable finance disclosure requirements, the corporate sustainability reporting directive, and the EU taxonomy.
• 1:39
  SPEAKER_01: So at its highest level, taxonomy is about classification.
• 1:43
  SPEAKER_01: So it requires companies to disclose as a ratio their percentage of sustainable activities over total economic activities.
• 1:53
  SPEAKER_01: And that ratio is referred to as a key performance indicator or a KPI.
• 1:57
  SPEAKER_01: Those ratios are different depending on whether you are financial services or a non-financial company.
• 2:02
  SPEAKER_03: Hence why I referred to those two company types in the introduction.
• 2:06
  SPEAKER_01: So if you are not a financial company, your KPI relate to turnover or revenue, capital expenditures or capex, and operating expenditures or opex.
• 2:18
  SPEAKER_01: Now, revenue and capex are pretty much as accountants would understand those definitions.
• 2:23
  SPEAKER_01: OpEx is as a defined term, is more about the expenditures like RD and renovations, things that support your capital program.
• 2:34
  SPEAKER_03: And before you go on to financial services, one thing that I found illuminating when I was starting to learn from you about the taxonomy regulation is that when we talk about these KPIs at the most highest level and simplistic form, we're really talking about what portion of your business is related to, I'll say loosely green activities.
• 2:55
  SPEAKER_03: I know you're going to get much more detailed, but I think that's helpful just to level set here.
• 3:00
  SPEAKER_01: So it's referred to as either the sustainability metrics or taxonomy-aligned metrics, but yes, that's core.
• 3:05
  SPEAKER_01: It's about these green activities.
• 3:06
  SPEAKER_01: Yes.
• 3:06
  SPEAKER_01: All right.
• 3:07
  SPEAKER_01: So FS.
• 3:08
  SPEAKER_01: So then from the FS side, those also differ by type of FS entity.
• 3:12
  SPEAKER_01: So all of the four delineated types of financial entities have a KPI related to investments, but then they each have another KPI as well.
• 3:23
  SPEAKER_01: So for example, credit institutions have to talk about assets under management or green asset ratio.
• 3:28
  SPEAKER_01: Insurance companies have to talk about underwriting and credit institutions have one.
• 3:33
  SPEAKER_01: Sorry, investment companies have one related to fees and commissions.
• 3:38
  SPEAKER_01: So they each have a specific KPI that need to be reported based on the type of entity.
• 3:45
  SPEAKER_01: And from a timing standpoint, companies under the NFRD, so the Non-Fanancial Reporting Directive, which is the predecessor to the CSRD, are actually currently reporting under the taxonomy already.
• 3:56
  SPEAKER_01: So right now, all companies that are in scope of the CSRD also have to report under the taxonomy.
• 4:02
  SPEAKER_03: All right.
• 4:02
  SPEAKER_03: And one of the headlines when the omnibus proposals were made in February was that the taxonomy companies in scope were going to change.
• 4:11
  SPEAKER_03: And I think there was a lot of excitement that this meant that change had already happened.
• 4:16
  SPEAKER_03: However, there's a big however there.
• 4:18
  SPEAKER_01: There is.
• 4:18
  SPEAKER_01: So the changes to the taxonomy regulation we'll get into have been agreed to.
• 4:23
  SPEAKER_01: There are elements of scoping.
• 4:25
  SPEAKER_01: So right now, the CSRD has a definition of a large entity that refers to$50 million in revenue.
• 4:31
  SPEAKER_01: The proposal among the omnibus package is to increase that.
• 4:36
  SPEAKER_01: So the large entities would have to have more than$450 million in revenue in order to qualify or be required to provide the taxonomy disclosures.
• 4:45
  SPEAKER_03: And I think a key point here, I guess two key points I would make.
• 4:48
  SPEAKER_03: One is that that has not happened yet.
• 4:50
  SPEAKER_03: That will be part of the broader changes as uh proposed from this content, so-called content proposal.
• 4:56
  SPEAKER_03: But the other thing is that the$450 was what was in the omnibus proposal, but that could change as well as a result of the negotiations.
• 5:04
  SPEAKER_03: Correct.
• 5:04
  SPEAKER_01: So that number, I think they picked it because it aligns with a number in the corporate sustainability due diligence directive.
• 5:10
  SPEAKER_01: But again, it is not final, so we could go either way.
• 5:12
  SPEAKER_03: Yes.
• 5:12
  SPEAKER_03: Okay, so Val, we know that any potential changes to the companies in scope uh are pending with the content proposal.
• 5:20
  SPEAKER_03: So in the meantime, does this mean companies can start applying these regulations or what needs to happen now?
• 5:26
  SPEAKER_01: Not quite yet.
• 5:27
  SPEAKER_01: So it's a great question.
• 5:28
  SPEAKER_01: So the taxonomy regulation amendments have been adopted by the European Commission, but they're still subject to scrutiny in this trilogue negotiation you've spoken about before.
• 5:38
  SPEAKER_01: So they need to be uh reviewed by the European Parliament and Council.
• 5:42
  SPEAKER_01: Uh, and they have four months to do that.
• 5:44
  SPEAKER_01: So it's a four-month scrutiny period.
• 5:45
  SPEAKER_01: Now they can't renegotiate the provisions of the regulation, but they can reject it.
• 5:49
  SPEAKER_01: Now, that said it's possible, but we haven't heard anything about that being likely.
• 5:54
  SPEAKER_01: But it does need to be finalized by uh all three parties first, uh, and then that scrutiny period can actually be extended if they want for an additional two months, and then the regulation would have to be posted in the official journal before it can be applied.
• 6:07
  SPEAKER_03: Okay, so then for our discussion today, though, we're going to talk about the amendments as approved on July 4th.
• 6:13
  SPEAKER_03: But one more question.
• 6:15
  SPEAKER_03: So if I go through the math, I believe this will be in theory, if they don't extend the scrutiny period, then these could be final, final for year end.
• 6:25
  SPEAKER_03: So does that mean then that companies in scope of the CSRD that are reporting this year on?
• 6:31
  SPEAKER_03: So wave one companies would be able to follow these revised or the amended regulations?
• 6:36
  SPEAKER_01: It's likely.
• 6:37
  SPEAKER_01: So they are expected to be effective January 1st, 2026, which the way the dating works under the taxonomy is any reports issued after January 1st, 26, they could apply the new rules.
• 6:48
  SPEAKER_01: Now, that said, they don't have to apply the new rules.
• 6:51
  SPEAKER_01: So there is no early adoption because there's probably not enough time in the calendar for early adoption.
• 6:56
  SPEAKER_01: But for years that begin in 2025, they can actually continue to provide or to follow the old rules.
• 7:03
  SPEAKER_01: So that's an election that they can make.
• 7:04
  SPEAKER_01: Now, you may say this is about simplification.
• 7:07
  SPEAKER_01: They're almost incentivized to apply the new rules.
• 7:10
  SPEAKER_01: But for companies like Wave One who have already applying the taxonomy regulation, they may be far enough along where they just say, let's just keep our process right now and not adopt the new ones.
• 7:18
  SPEAKER_03: So simplistically then, if I'm a Wave One calendar year entity, then for this upcoming, upcoming calendar year end, I could apply the old rules or apply these new rules, assuming they got through the scrutiny period and with no changes.
• 7:34
  SPEAKER_03: However, I will be required to apply these new rules for my following year because then it would be a fiscal year that began after 2025.
• 7:43
  SPEAKER_03: That is correct.
• 7:44
  SPEAKER_03: Okay.
• 7:44
  SPEAKER_03: All right.
• 7:45
  SPEAKER_03: So then with all of that said, for today's podcast, we're going to focus on the changes and as though they are going to be adopted as proposed, because that's what we think is most likely.
• 7:54
  SPEAKER_03: Uh so let's start with non-FS companies.
• 7:56
  SPEAKER_03: What can they expect?
• 7:57
  SPEAKER_01: So the biggest change in the new regulation is the adoption of a materiality threshold.
• 8:03
  SPEAKER_01: Um, now this may not be as much of a help as people hoped it would be, but uh the taxonomy regulation was famous for not having any materiality threshold.
• 8:12
  SPEAKER_01: So you had to evaluate all of your economic activities and report all of them in your KPI.
• 8:17
  SPEAKER_01: Now, in the amendments, they put a 10% cumulative threshold.
• 8:22
  SPEAKER_01: Now it's a cumulative threshold.
• 8:24
  SPEAKER_01: So what that means is you can identify up to 10% of your business as not being material, and therefore you don't need to report it in your KPI.
• 8:34
  SPEAKER_01: Now that means because it's a cumulative threshold, if you had, for example, a company with 25% activities, you could pick two of them and say that they're not material, but you'd have to report all of the other 18, even though they're individually under that 10% threshold.
• 8:51
  SPEAKER_01: So it's a cumulative threshold that has to be met.
• 8:53
  SPEAKER_01: The rest of it would need to be reported.
• 8:55
  SPEAKER_01: And you also can't subdivide an activity.
• 8:58
  SPEAKER_01: So if you have an activity that's applicable across the globe, you can't say, well, 90% of it is in Europe, so I won't talk about my 10% in South America.
• 9:06
  SPEAKER_01: Once an activity is in, you'll need to assess the full activity.
• 9:09
  SPEAKER_03: Oh, it's very interesting because, in particular, in the proposed ESRS, so again, also completely not final, even uh definitely much less final because we're in the comment period from FREG, they do have some provisions for if basically the risk is concentrated in one region.
• 9:28
  SPEAKER_03: You could report the metric based on that risk.
• 9:30
  SPEAKER_03: That's way too simplistic.
• 9:32
  SPEAKER_03: So don't take that away.
• 9:33
  SPEAKER_03: But it's just interesting that they took a different approach between those two.
• 9:37
  SPEAKER_03: Obviously, ESRS right now is still with the FRAG, and this is from the European Commission.
• 9:41
  SPEAKER_03: Uh so that limit, though, I guess just going back to what you were just speaking on, doesn't actually seem like it might, it may not be that much help.
• 9:50
  SPEAKER_03: Although if you have a lot of little activities, it could be then.
• 9:54
  SPEAKER_03: It could be.
• 9:54
  SPEAKER_01: Um, agreed.
• 9:55
  SPEAKER_01: So uh in certain companies on the smaller side with a smaller scope of activities, it may be helpful to them.
• 10:01
  SPEAKER_01: It's always going to be a little bit of help.
• 10:03
  SPEAKER_01: But the interesting part is that uh even though you identify an activity as not being material, you still have to disclose the amount of the activity that you've identified as not material.
• 10:15
  SPEAKER_01: So you still have to go through the exercise of identifying it and quantifying it so you can disclose it, even though you don't have to go through the full taxonomy sort of gauntlet.
• 10:24
  SPEAKER_01: Um, so as much as it was billed as helping the eligibility on the front end and the sustainability metric on the back end, it's really just helping you on that alignment element on the back end.
• 10:34
  SPEAKER_03: Okay, so then can you remind us what alignment is?
• 10:36
  SPEAKER_03: Because from what you're describing, this doesn't sound like that much at help.
• 10:40
  SPEAKER_01: So alignment is um, well, I guess maybe I'll start at the beginning.
• 10:44
  SPEAKER_01: The from a process for the taxonomy, you start with your eligible economic activities.
• 10:49
  SPEAKER_01: And those are activities that are delineated in the delegated acts, and there's a series of delegated acts.
• 10:55
  SPEAKER_01: Once you have an economic activity, you need to assess whether it makes a substantial contribution to one of six environmental objectives.
• 11:03
  SPEAKER_01: Now, those six environmental objectives are actually the five standards of the ESRS, except that they subdivide climate into climate mitigation and climate adaptation, but otherwise it's biodiversity, pollution, water, and circular economy.
• 11:16
  SPEAKER_03: Once you So environmental standards.
• 11:18
  SPEAKER_03: Environmental standards, yes.
• 11:20
  SPEAKER_01: Um it's only focused on the environmental standards at this stage for the taxonomy.
• 11:25
  SPEAKER_01: So once you've identified it as making a substantial contribution to one of those objectives, you then need to look at whether it does harm to one of the other ones.
• 11:35
  SPEAKER_01: So if you are making a substantial contribution to pollution, you need to make sure you are not doing harm to any of the other five objectives.
• 11:43
  SPEAKER_01: Once you pass that hurdle, you then need to assess the minimum safeguards.
• 11:48
  SPEAKER_01: And the minimum safeguards are about more of a governance and uh human capital, so anti-corruption, anti-bribery, et cetera.
• 11:56
  SPEAKER_01: If you pass all of those gauntlets in no particular order, so there's no requirement that you do them in series, you've then identified a taxonomy-aligned activity, and that's what we refer to as sustainable activities, and that's the basis for that KPI.
• 12:10
  SPEAKER_03: Okay.
• 12:10
  SPEAKER_03: That's a lot to think about.
• 12:12
  SPEAKER_03: So before we go on to talk about the other relief, I think it might be helpful to just remind people of why they went down the path of this simplification in the first place, because again, it doesn't sound like that much simplification, but again, like what was the purpose of this?
• 12:29
  SPEAKER_03: Um taxonomy is hard.
• 12:31
  SPEAKER_01: Um I think we've covered that before.
• 12:33
  SPEAKER_01: Yeah.
• 12:34
  SPEAKER_01: Um, and this was one of the elements that also generated the omnibus proposals, right?
• 12:38
  SPEAKER_01: So it's part of an overall movement within the European Union to reduce by, I think, 25% the regulations.
• 12:44
  SPEAKER_01: Uh, so this is one of the elements that they looked at.
• 12:46
  SPEAKER_01: There are um different regulations, uh, sorry, reliefs and changes to the regulation that we'll get into on the financial services side.
• 12:54
  SPEAKER_01: And some argued that uh the financial side was a little bit more complicated and needed a little bit more clarification than perhaps the non-FS side.
• 13:02
  SPEAKER_01: Although I'm sure that the non-FS people listening will not agree with me on that.
• 13:06
  SPEAKER_01: Um, but it is uh, you know, every little bit helps.
• 13:09
  SPEAKER_01: There are some other changes that they've made uh to the regulations that may help a little bit more.
• 13:13
  SPEAKER_01: Um, but I agree with you, they are trying to do the right thing, they're moving in the right direction, but it's probably not as dramatic as some people hoped.
• 13:19
  SPEAKER_03: All right.
• 13:20
  SPEAKER_03: And then again, before we go on, I think in the reduction, and we're both going off memory here, it's 25% reduction in the reporting burden, not in the regulation overall.
• 13:30
  SPEAKER_03: Because I the the true regulations haven't actually changed.
• 13:34
  SPEAKER_03: This is a lot of focus on the reporting uh portion of it.
• 13:38
  SPEAKER_03: All right, so then what are some of the areas you would look to as being more substantial relief?
• 13:43
  SPEAKER_01: So there are changes that are related to the templates.
• 13:47
  SPEAKER_01: And again, I'm gonna caveat here a little bit.
• 13:49
  SPEAKER_01: The templates are brand new.
• 13:51
  SPEAKER_01: Um they have uh the KPI need to be reported in prescribed templates.
• 13:55
  SPEAKER_01: That has not changed.
• 13:56
  SPEAKER_01: There are still forms that need to be completed.
• 13:59
  SPEAKER_01: Those forms are greatly simplified.
• 14:01
  SPEAKER_01: So from a data point standpoint, they uh by the European Commission's assessment, they have over a 60% reduction in the data points in those forms.
• 14:10
  SPEAKER_01: Now that's great, but again, what we're saying is I would not expect a 64% reduction in effort.
• 14:17
  SPEAKER_01: So they did get rid of some of the noise on the statements and they made them a little bit easier to follow.
• 14:21
  SPEAKER_01: So that's helpful.
• 14:22
  SPEAKER_01: Uh they removed two of the templates.
• 14:24
  SPEAKER_01: There used to be specific templates that had to be completed for nuclear and fossil gases.
• 14:29
  SPEAKER_01: You no longer need to report those.
• 14:31
  SPEAKER_01: Uh, that'll just be part of your normal activities.
• 14:33
  SPEAKER_01: So they did remove the reduce the number of templates.
• 14:36
  SPEAKER_01: Um, there's an assessment released on operating expenditures that some people actually uh misinterpret as being a recent change.
• 14:44
  SPEAKER_01: But um, if operating expenditure is not a significant component of your business, you actually don't need to report your opex as a KPI.
• 14:52
  SPEAKER_01: Now, that was the provision previously, it's gotten a lot more attention now.
• 14:55
  SPEAKER_01: Um, and what we find that most often is in service entities where uh opex is not a significant component, because as I mentioned in the beginning, opEx is more about how you service your capital.
• 15:05
  SPEAKER_01: So for businesses that are not capital intensive, that's going to be more helpful for them.
• 15:09
  SPEAKER_03: All right.
• 15:09
  SPEAKER_03: And then Val, you mentioned do no significant harm as one of the considerations in applying these rules.
• 15:15
  SPEAKER_03: Have we also seen changes there?
• 15:17
  SPEAKER_01: That's actually a good reminder.
• 15:19
  SPEAKER_01: That's another element from a uh non-FS entity standpoint.
• 15:23
  SPEAKER_01: So when you have made a substantial contribution to one of uh to five of the elements, you still need to assess whether you have done significant harm to the pollution objective.
• 15:34
  SPEAKER_01: In order to do that, you need to review the detail of what it means to do significant harm to pollution.
• 15:41
  SPEAKER_01: And that was detailed in something called appendix C.
• 15:43
  SPEAKER_03: But wait, only pollution, or are you only?
• 15:45
  SPEAKER_03: It's only pollution.
• 15:46
  SPEAKER_03: But you do no significant harm is broader than pollution.
• 15:49
  SPEAKER_03: That's the only one aspect.
• 15:51
  SPEAKER_03: Correct.
• 15:51
  SPEAKER_01: So what I'm focusing on is the do no significant harm criteria.
• 15:55
  SPEAKER_01: You definitely need to assess do no significant harm for all of the objectives.
• 15:58
  SPEAKER_01: Okay.
• 15:58
  SPEAKER_01: The change that was made only relates to do no significant harm to pollution.
• 16:03
  SPEAKER_01: Okay.
• 16:03
  SPEAKER_01: Specifically, appendix C to the delegated acts that detailed what it means to do no significant harm.
• 16:09
  SPEAKER_01: Now, in that appendix C, they referred to the CLP regulation in the EU.
• 16:14
  SPEAKER_01: It's classification, labeling, and packaging.
• 16:17
  SPEAKER_01: So the CLP regulation brought in a whole host of other chemicals that you needed to evaluate in order to prove that you have done no significant harm.
• 16:25
  SPEAKER_01: They've essentially deleted that paragraph, and therefore you no longer have this broader population of chemicals to assess.
• 16:32
  SPEAKER_01: So it made it a narrower list of chemicals that you need to assess in order to support that you have done no significant harm to the pollution objective.
• 16:40
  SPEAKER_03: And so where does the list of so now if they don't have that CLP, is there still a list of chemicals, though it's just not as long?
• 16:47
  SPEAKER_03: There is, correct.
• 16:48
  SPEAKER_03: Okay.
• 16:48
  SPEAKER_03: All right.
• 16:49
  SPEAKER_03: So that sounds like a positive change.
• 16:51
  SPEAKER_03: Anything else on non-FS before we move on to FS?
• 16:55
  SPEAKER_01: Um, other than the appendix C and the templates, that's probably the the primary ones.
• 17:01
  SPEAKER_03: All right.
• 17:01
  SPEAKER_03: So do you know significant harm?
• 17:04
  SPEAKER_03: I mean, so we have a few areas of change, but you said that our main areas of change we are expecting to see are in FS companies.
• 17:11
  SPEAKER_03: So let's turn our attention to those.
• 17:13
  SPEAKER_03: So when we start to think about FS, what are some of the major changes?
• 17:17
  SPEAKER_01: So some of them are the same and some of them are different.
• 17:20
  SPEAKER_01: Um, so first, the easiest, um, let's talk about some of the similarities.
• 17:25
  SPEAKER_01: The templates are all different for financial services.
• 17:28
  SPEAKER_01: So, again, there it's actually even more dramatic.
• 17:30
  SPEAKER_01: They're saying it's about a 90% reduction in data points for the templates, um, but again, not a 90% reduction in effort.
• 17:37
  SPEAKER_01: Uh, FS companies also will not need to complete the nuclear and fossil gas templates specifically, although different from non-FS companies, they actually will have to disclose the percentage of nuclear and fossil gas activities that they have, even though they don't need to include the template.
• 17:54
  SPEAKER_01: And that's different.
• 17:55
  SPEAKER_01: So that's a difference between the FS and non-FS companies.
• 17:57
  SPEAKER_01: And when you say that they have, that's financed or so related to the eligible activities that they have related to that.
• 18:04
  SPEAKER_01: It could, in most cases, will be related to financed, it could relate to assets under management, et cetera.
• 18:08
  SPEAKER_03: But investments.
• 18:10
  SPEAKER_03: Yes.
• 18:10
  SPEAKER_03: So not that they're actually operating the nuclear plant, although I guess.
• 18:14
  SPEAKER_01: Most of the side activities are based on what they are, um, their assets, what they're actually financing.
• 18:19
  SPEAKER_03: Okay, that's helpful.
• 18:21
  SPEAKER_03: So then how about uh you mentioned potentially delay in timing?
• 18:24
  SPEAKER_03: So what what did we mean when we referred to?
• 18:27
  SPEAKER_01: So the in the original rollout of the taxonomy regulation, non-FS companies came first.
• 18:33
  SPEAKER_01: Um and then in the phased-in approach, you had the FS companies.
• 18:36
  SPEAKER_01: So FS companies have been reporting, I think for only one year, I'll have to double check that, but um, for a lot less time.
• 18:41
  SPEAKER_01: And as I also mentioned, FS is really complex on how it deals with counterparty data.
• 18:47
  SPEAKER_01: Um, so they did put in a provision that as long as financial companies don't assert that they're taxonomy aligned or that they have sustainable activities, they actually don't need to report under the taxonomy until 2028 on 27 information.
• 19:04
  SPEAKER_01: If they choose that option and it's an election, um, they then need to make an affirmative statement that they are not claiming to be sustainable and that um so they're standing by basically their position that they are not claiming any sustainability in order to be able to take that exemption.
• 19:20
  SPEAKER_03: So, from a practical point of view, did we expect that many companies would take that exemption?
• 19:25
  SPEAKER_01: I'm not sure.
• 19:26
  SPEAKER_01: Um, as you know, I operate a little bit more on the non-FS side.
• 19:29
  SPEAKER_01: So uh the conversations on the FS side, I think um it's gonna depend on where they are in the life cycle of planning for this because it's a lot of effort.
• 19:36
  SPEAKER_01: So some of them I think may choose to continue.
• 19:39
  SPEAKER_01: I think there's an element of looking at your peer group and who else is reporting.
• 19:43
  SPEAKER_01: So I think that's remains to be seen a bit.
• 19:45
  SPEAKER_03: All right.
• 19:46
  SPEAKER_03: So very interesting.
• 19:47
  SPEAKER_03: And maybe some non-FS companies that aren't very sustainable might might be a bit jealous.
• 19:54
  SPEAKER_03: So anything else on timeline then?
• 19:58
  SPEAKER_01: Um so from a um the timeline, I think, is that two-year delay.
• 20:03
  SPEAKER_01: But even if they don't take the two-year delay, there's still the materiality threshold that they get as well.
• 20:09
  SPEAKER_01: Um so they can apply that 10% threshold, which is applied the same way as it is for the non-FS, and again, on a cumulative basis, um, but they can apply that element as well.
• 20:18
  SPEAKER_01: So that will help them out.
• 20:20
  SPEAKER_01: So um, those are really the the similarities where you have on the changes to the templates and the 10% threshold, and then the difference is that two-year delay that's uh optional.
• 20:29
  SPEAKER_03: Okay, any other differences that we should highlight?
• 20:32
  SPEAKER_01: From an FS standpoint, there were previously, um, and this gets into a lot of the detail of how the uh KPI are calculated, but there were disconnects between the numerator and the denominator when you calculate KPI.
• 20:47
  SPEAKER_01: So, for example, cash and derivatives were required to be included in the denominator, but were specifically excluded from the numerator.
• 20:56
  SPEAKER_01: So it was automatically dilutive to your KPI.
• 20:59
  SPEAKER_01: And so they've made a better match of that.
• 21:02
  SPEAKER_01: So um cash derivatives, interbank loans, and I think one or two other assets are now, if they're excluded, are excluded from both the numerator and the denominator.
• 21:11
  SPEAKER_03: So like basic ultra almost on those lines, yeah.
• 21:14
  SPEAKER_01: Exactly.
• 21:14
  SPEAKER_01: So that was not an unexpected improvement.
• 21:17
  SPEAKER_01: Yeah.
• 21:17
  SPEAKER_01: Um, and then where it gets a little bit more complicated is there was also a you were allowed to, or were required actually, to exclude exposures or investments in entities that were not subject to the CSRD from the numerator, but they were included in the denominator.
• 21:35
  SPEAKER_01: Oh, so similar.
• 21:36
  SPEAKER_01: It was similar, exactly.
• 21:37
  SPEAKER_01: So they've made that alignment, but um it gets a little bit more complicated when you think about there's now a disconnect between who applies the CSRD and who applies the taxonomy in two key areas.
• 21:48
  SPEAKER_01: So one they've addressed.
• 21:49
  SPEAKER_01: So if you have a company in scope of the CSRD, they have to be in the numerator and the denominator.
• 21:56
  SPEAKER_01: But maybe they have applied the 10% non materiality threatening.
• 22:00
  SPEAKER_01: Threshold.
• 22:00
  SPEAKER_01: So they don't haven't disclosed the data that you need for a financial services company to report their own KPI.
• 22:07
  SPEAKER_01: So there is a formula within the regulation that tells you how to treat that scenario.
• 22:12
  SPEAKER_01: What will be interesting is if the content proposal is finalized and you have a higher threshold, that 450 nine threshold for taxonomy, now you have a much larger population of companies who are in the CSRD, but not the taxonomy, and they'll need to address how to how to fix that.
• 22:27
  SPEAKER_03: Well, yes.
• 22:28
  SPEAKER_03: And I guess, well, one thing I'm sure we've talked about on past podcasts, but that's quite interesting, is so then if your main, I'll use word, aligned activities are with companies that are not subject to CSRD, then you're not getting credit for them.
• 22:45
  SPEAKER_01: Your KPI are going to be very small.
• 22:46
  SPEAKER_03: Yeah.
• 22:47
  SPEAKER_03: And so and I guess the I'm guessing the intent on this or the thinking was that you wouldn't necessarily have the data.
• 22:54
  SPEAKER_03: And so it was actually easier to exclude those companies.
• 22:57
  SPEAKER_03: Or do we know why they have that line?
• 23:00
  SPEAKER_01: It's part of it is you don't know what you don't know.
• 23:04
  SPEAKER_01: Yeah.
• 23:04
  SPEAKER_01: So if they are not providing information about the taxonomy, then from a bank standpoint, from an insurance company standpoint, it would be difficult for them to make an estimate about the level of sustainability.
• 23:14
  SPEAKER_01: So it actually is reasonable, but it really makes it much more complicated when you're looking at that difference between CSRD and taxonomy that's possible with a content proposal.
• 23:23
  SPEAKER_03: Yeah.
• 23:23
  SPEAKER_03: And again, I'm coming from my power and utilities background, as frequent viewers, listeners know.
• 23:28
  SPEAKER_03: And just thinking, okay, and actually I was driving with my daughter passing many, many wind farms over this weekend.
• 23:35
  SPEAKER_03: And so just thinking, oh, you're you're financing a wind farm in the US.
• 23:40
  SPEAKER_03: So, and let's say it's just a US local company not subject to CSRD, but it's wind farm.
• 23:46
  SPEAKER_03: So it doesn't seem that hard to identify the alignment.
• 23:49
  SPEAKER_03: But what you're saying is, well, no, it doesn't matter.
• 23:51
  SPEAKER_03: You would exclude that investment from both the if they were not reporting under the CSR.
• 23:56
  SPEAKER_01: Right.
• 23:57
  SPEAKER_01: Um, because when you're a financial company, if I am you it's such a really good example, if I am financing your wind farm and you, let's say you produce KPI because it is a sustainable activity, I know your KPI, I can build that into my disclosures.
• 24:10
  SPEAKER_01: But if I give you a general loan and I don't know what you're using it for, then I have no way of guessing what level of sustainability there is.
• 24:18
  SPEAKER_03: Yeah.
• 24:18
  SPEAKER_03: And I guess so I guess in theory, these financial services companies could tell a company, oh, well, we want you to do voluntary EU taxonomy reporting, but you said it's subject to CRSRD.
• 24:29
  SPEAKER_03: So it's not even that you're providing the information.
• 24:32
  SPEAKER_01: It correct.
• 24:33
  SPEAKER_01: So it would be, although I guess I'm thinking out loud on that one.
• 24:37
  SPEAKER_01: I would imagine if they've made voluntary reporting, I'll need to check whether they covered that relation.
• 24:41
  SPEAKER_01: The reporting might be covered.
• 24:42
  SPEAKER_03: Yeah, and I've gone way off our uh our topic.
• 24:45
  SPEAKER_03: So that wouldn't be something for next time.
• 24:47
  SPEAKER_03: And I don't think it's it's necessarily pertinent for this uh podcast, but it is interesting again, if you take a step back and think, you started this saying it's for the European Green Deal.
• 24:57
  SPEAKER_03: And so, but again, I guess European Green Deal, the large companies would be subject to CSRG, but with all these thresholds moving, that's where it's it starts to interesting me to think to think that through.
• 25:09
  SPEAKER_03: All right.
• 25:12
  SPEAKER_03: So anything else from a change's point of view for FS companies?
• 25:16
  SPEAKER_01: No, I think it's just a uh question about watching uh when the rules are finalized.
• 25:23
  SPEAKER_01: Um, there is that series.
• 25:24
  SPEAKER_01: So once they uh finish the uh scrutiny period, they'll need to be posted to the uh official journal.
• 25:30
  SPEAKER_01: There's then effective 20 days later, and then that January 1st effective date.
• 25:34
  SPEAKER_01: So I think companies right now should be looking at whether they're going to take advantage of some of these provisions uh and exactly how they impact their operations, their controls, their procedures.
• 25:42
  SPEAKER_01: So I think there's some decisions to be made for companies on both the FS and the non-FS side.
• 25:47
  SPEAKER_03: So, Val, very interesting there that you said some provisions of the acts.
• 25:51
  SPEAKER_03: So does that mean you could apply some of the old delegated acts, some of the new, or we would expect, I presume, that you either say I'm going to continue to follow the old one for my 2025 reporting in 2026, or I'm going to fully adopt the new regulation.
• 26:07
  SPEAKER_01: That makes sense to me.
• 26:08
  SPEAKER_01: I think some I tend to hedge my bets in a lot of cases, but uh in this case, I agree that uh I think you'd have to either choose that you are following the new regulation or the old regulation.
• 26:17
  SPEAKER_01: Uh, and trying to do half and half, I don't think would work at all.
• 26:21
  SPEAKER_03: All right.
• 26:21
  SPEAKER_03: And then Val, just any other words wisdom for companies as they're thinking this through?
• 26:27
  SPEAKER_01: I think there's a lot going on.
• 26:28
  SPEAKER_01: Uh obviously you need to stay up to date with the status of the negotiations and when it's actually effective, um, which is good that we have an in-brief out there, which we discussed uh that was issued in July based on the when the taxonomy regulation was released.
• 26:42
  SPEAKER_01: And we'll keep that up to date as it progresses as far as whether it's effective or not.
• 26:45
  SPEAKER_01: Uh, and then we are in the process of updating the uh sustainability reporting guide for all of the changes as well.
• 26:51
  SPEAKER_03: All right.
• 26:51
  SPEAKER_03: Well, Val, it's always such a pleasure to talk to you.
• 26:54
  SPEAKER_03: Thanks so much for joining me today.
• 26:55
  SPEAKER_03: Thanks, Heather.
• 26:56
  SPEAKER_03: All right, and then to our listeners slash viewers, as always, thank you as well for joining us today.
• 27:00
  SPEAKER_03: And we hope you will join us again next week for the next episode in PWC's The County Podcast.
• 27:06
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• 27:15
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• 27:18
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• 27:23
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• 27:40
  SPEAKER_02: From Thought Leadership at PWC, I'm Heather Horn.
• 27:44
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