Regulatory environment

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the EU has introduced reporting standards for companies and a framework for investment - known as the taxonomy

For circularity to become embedded in the automotive industry, it is essential that a common language around what constitutes sustainable economic activity is created.

To this end, the EU has introduced reporting standards for companies and a framework for investment - known as the taxonomy - as part of its wider approach to increasing sustainability under the Green Deal framework.

The transition to a circular economy is actually one of five environmental objectives defined in the Green Deal. The others include climate change mitigation and adaptation, sustainable use and protection of water and marine resources, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.

Non-financial reporting

The taxonomy imposes a number of non-financial reporting commitments on companies. Under the EU’s proposed rules, known as the Corporate Sustainability Due Diligence Directive, companies with more than 500 employees or €150m in global turnover, would be required to identify and prevent or mitigate activities such as child labour, worker exploitation, or damage to natural ecosystems in their supply chains.

From this year the intention is that companies will be required to disclose a proportion of their turnover, CapEx, and OpEx associated with economic activities that qualify as environmentally sustainable.

Criticism

The taxonomy has attracted criticism. For instance, while it explicitly recognises the contribution of the manufacture of hydrogen vehicles and components, batteries, and electric vehicles to climate objectives, it does not address EV components explicitly.

The European Association of Automotive Suppliers states¹ that automotive supplier investments and revenues related to the production of EV components should be taxonomy eligible.

It says a distinction between vehicle assembly and component production in the implementation of the taxonomy, would disadvantage automotive suppliers over vehicle manufacturers. It adds that the taxonomy will only efficiently direct capital to the transport equipment sector if automotive suppliers can apply similar screening criteria as vehicle manufacturers, and access the market for sustainable investment on equal terms.

If research, design, and production of components for EVs are not considered taxonomy eligible, the level playing field between vehicle manufacturers and automotive suppliers will be distorted, it adds. Over the years, this could allow vehicle manufacturers to access capital at better conditions and distort competition in the capital market.

1 Keys to a successful implementation of the EU’s sustainable financial taxonomy (European Association of Automotive Suppliers)
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