EU Taxonomy: Disclosures for financial year 2022

EU Taxonomy: Background and objectives

At ABB, we are determined to shape our future in an environmentally sustainable way by investing in environmentally sustainable activities.

The pursuit of environmentally sustainable business is not only important to the public – it represents the paramount challenge of our times. To help address this challenge, the European Union (EU) has taken the lead in standardizing sustainability-related data and defining environmentally sustainable criteria and objectives.

As part of the European Green Deal, the EU aims to become climate-neutral and to reduce greenhouse gases generated within its borders to net zero by 2050. With the Action Plan on Financing Sustainable Growth, the European Commission intends to reorient the European economic and financial system towards more sustainable technologies and businesses.

The core of the action plan is found in the EU Taxonomy, which establishes a list of sustainable economic activities with the goal of identifying and scaling up green investments. This classification system defines “environmentally sustainable” business activities and translates the EU’s climate and environmental objectives into criteria for specific economic activities. The EU Taxonomy aims to provide companies, investors and policymakers with appropriate definitions that specify under which circumstances economic activities can be considered environmentally sustainable. Furthermore, the EU Taxonomy seeks to inhibit “greenwashing” and to promote greater transparency regarding the true environmental sustainability of economic activities.

The Taxonomy regulationRegulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088., the Climate Delegated Act including associated Annexes I and IICommission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852., the Delegated Act supplementing Article 8Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852. and the Complementary Climate Delegated ActCommission Delegated Regulation (EU) 2022/1214 of 9 March 2022 amending (EU) 2021/2139 and (EU) 2021/2178 will apply from January 1, 2023, and includes specific nuclear and gas energy activities in the list of economic activities., which regulate the disclosure obligations in accordance with Article 8 of the Taxonomy regulation, currently form the legal framework for the EU Taxonomy reporting. In addition, the Taxonomy FAQs and Notices published by the European Commission have been taken into consideration in our disclosures.

In accordance with the EU Taxonomy, an economic activity is “eligible” if it can potentially contribute to realizing at least one of the six environmental objectivesClimate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control and protection and restoration of biodiversity and ecosystems. and is listed in relevant EU Taxonomy delegated acts, irrespective of whether that activity meets any or all of the technical screening criteria laid down.

Economic activities are not eligible for the Taxonomy when they are not specifically described in the Climate Delegated Act or other relevant delegated acts and when no technical screening criteria have been defined for them.

From January 1, 2022, the Taxonomy regulation requires corporate entities to disclose their environmentally sustainable activities. An eligible activity is only considered environmentally sustainable (i.e., “Taxonomy-aligned”) if it meets the technical screening criteria (TSC):

• Makes a substantial contribution to one of the environmental objectivesFor the 2022 reporting period, only the two climate objectives must be covered, as the technical screening criteria for the remaining four environmental objectives are not yet available. by complying with the substantial contribution (SC) defined for the activity (e.g., level of carbon emissions)
• Meets “do no significant harm” (DNSH) criteria, having no negative effect on any of the other five environmental objectives (e.g., from the asset, process or product)
• Complies with the minimum safeguards (MS) related primarily to human rights and social and labor standards

For the first year of reporting, on financial year 2021, disclosures were limited to the proportions of Taxonomy-eligible and Taxonomy-non-eligible turnover, capital expenditure (Capex) and operating expenditure (Opex), as well as qualitative information.

The turnover KPI is intended to indicate current contributions to the environmental objectives, while the Capex KPI and the part of the Opex KPI related to research and development (R&D) are forward-looking investment measures.

For the second year of reporting, on financial year 2022, the disclosure requirements were expanded. In addition to the previous disclosures, companies must also disclose the proportions of “Taxonomy-aligned” turnover, Capex and Opex, along with supporting qualitative information.

The following disclosures are prepared in line with the Taxonomy regulation Art. 8, and the related delegated acts. The Taxonomy regulation is a living legislation, dynamic in its development; the formulations and terms contained in these pieces of legislation are subject to uncertainty in interpretation and will require further clarification. Therefore, the following discussion relies on our own current interpretation; the principles applied for this year’s reporting may not be applied in the same way in the future.

How ABB adopted the EU Taxonomy

Following the release of the Climate Delegated Act in June 2021, we conducted an analysis of our products, sites and activities and reviewed them against the economic activities defined by the Taxonomy in all the countries in which we operate. We involved the expertise of our product managers, real estate managers, sustainability managers, financial controllers, R&D controllers and environmental managers across all levels of our organization and solicited advice from external consultants. Through this procedure, relevant Taxonomy-eligible and -aligned activities were identified across the Group.

To assess eligibility, we reviewed the ABB Global product offering and mapped these to the economic activities defined by the Taxonomy. Most of our eligible products and services are considered “enabling activities” as defined by the Taxonomy.

To identify the relevant activities, we referred to the descriptions of the activities, the relevant Nomenclature of Economic Activities (NACE) codes and, if necessary, the substantial contribution criteria, thereby assessing whether an economic business activity carried out by ABB matches an activity description. Each ABB business division then broke down their offerings or economic activities to the level of granularity required to identify and meet the eligibility and alignment criteria.

ABB’s real estate initiatives were mapped at the country level, and EU Taxonomy data collection and reporting was coordinated centrally. Investments were identified either centrally, at the business area or division level (e.g., large investments, such as business acquisitions), or at the country level (e.g., real estate) and then mapped to the relevant activity or allocated to activities based on the percentage of eligible and/or aligned revenue. Research and development activities were analyzed for the purpose of Taxonomy reporting under a twofold approach: (i) eligible and aligned R&D projects identified based on the product mapping, and (ii) other Opex allocated based on the percentage of eligible and aligned turnoverThe terms turnover and revenue are used interchangeably throughout this document. allocated projects.

The procedures were determined in consultation with ABB’s Sustainability Board. The Sustainability Board and the Finance, Audit and Compliance Committee of the Board were kept informed of progress, possible risks and obstacles, as well as current developments.

Economic activities of ABB in the context of the EU Taxonomy

ABB’s purpose is to enable a more sustainable and resource-efficient future through all our business activities. As a global technology leader, ABB is well-positioned in all our markets, and our businesses benefit from the key global trends of sustainability, digitalization, electrification and automation. ABB’s strategy is deeply rooted in our purpose and is designed to accelerate profitable growth by capitalizing on key global trends.For additional information, refer to the ABB Integrated Report 2022.

Our purpose is the cornerstone of ABB’s direction and strategy. Through our technologies and responsible business practices, we aim to make our stakeholders and society more sustainable. We achieve this by addressing the world’s energy challenges, transforming industries and embedding sustainability in all our activities and processes across our value chain.

Our purpose is based on five themes that capture the essence of what ABB stands for, what we aspire to, and how we make a permanent sustainable impact: creating success, leading with technology, addressing the world’s energy challenges, transforming industries, and embedding sustainability. With these themes in mind, we enable a more sustainable and resource-efficient future with our technology leadership in electrification and automation.

Eligibility and substantial contribution assessments

Our activities in Electrification, Motion, Process Automation and Robotics & Discrete Automation business areas, together with our real estate activities, are partially eligible under the EU Taxonomy to contribute to the environmental objective of climate change mitigation.

The analysis of the economic activities in the context of the EU Taxonomy has not revealed any ABB activities that are eligible under the environmental objective of climate change adaptation; hence we believe that our main contribution is in climate change mitigation.

The table below presents the allocation of our activities to the economic activities listed in the EU Taxonomy under the environmental objective of climate change mitigation. Changes may be made to this list of economic activities in the future as the rules around the Taxonomy evolve.

ABB Group Economic activities 2022 in accordance with the EU Taxonomy (“Taxonomy-eligible”)
Environmental objective: climate change mitigation

ABB’s activities were mapped following the ABB product tree by business area, division, product group, product line and industry usage. Financial data was extracted from various management reporting tools and reconciled to our consolidated figures at the division or product group level.

In 2022 we reassessed our 2021 eligible activity mapping, and activities were subjected to a series of screening tests to determine if they are Taxonomy-aligned. We completed the alignment assessment for our products, our real estate and R&D activities centrally at the business area and business division levels.

ABB makes substantial contributions to the following activities:

• 3.1 Manufacture of renewable energy technologies,
• 3.3 Manufacture of low-carbon technologies for transport,
• 3.4 Manufacture of batteries,
• 3.5 Manufacture of energy efficiency equipment for buildings,
• 6.15 Infrastructure enabling low-carbon road transport and public transport,
• 6.16 Infrastructure enabling low-carbon water transport,
• 7.3 Installation, maintenance and repair of energy efficiency equipment,
• 7.4 Installation, maintenance and repair of charging stations for electric vehicles in buildings,
• 7.5 Installation, maintenance and repair of instruments and devices for measuring, regulation and controlling energy performance of buildings, and
• 7.6 Installation, maintenance and repair of renewable energy technologies.

The alignment criteria were assessed on an activity-by-activity or product-by-product basis using the technical screening criteria for the mapped activity.

Do no signifcant harm (DNSH)

The DNSH criteria were analyzed for economic activities where ABB meets the substantial contribution condition as listed above. ABB used a structured assessment to document its compliance with the DNSH criteria for the other five environmental objectives. Based on the DNSH criteria for the relevant economic activities, our assessment was carried out at the activity, company and site levels. For site-specific criteria, we focused our analysis on sites that produce products meeting the substantial contribution condition.
Below, we set out our interpretation and describe the main analyses conducted. The assessments confirm that we meet the requirements of the DNSH criteria.

1. Climate change adaptation
   We conducted a screening of the relevant physical climate risks and performed an initial climate risk and vulnerability assessment to identify which manufacturing sites may be affected by physical climate risks during their expected lifetimes. The climate risk and vulnerability analysis were based on Representative Concentration Pathway (RCP) scenarios 4.5 and 8.5 up to the year 2050. Furthermore, we assessed the relevance of identified climate risks on the economic activity and potential adaptation solutions that could reduce identified risks. At ABB, we are continuously aiming to improve our climate risk assessments.
2. Sustainable use and protection of water and marine resourcesFor further information, refer to the “Water conservation” chapter in the ABB Sustainability Report 2022.
   We assessed our activities for relevant sites regarding the sustainable use and protection of water and marine resources by measuring the fulfillment of requirements for water quality preservation, water stress avoidance and water impact assessment. Our sites within this scope are certified according to ISO 14001 Environmental Management Systems and ISO 9001 Quality Management Systems or provided other documentation which served as a basis for our assessment, supplemented by additional external data sources.
3. Transition to a circular economy
   To help preserve the Earth’s resources for future generations, ABB takes a company-wide approach to circularity. By 2030, at least 80 percent of our products and solutions will be covered by our circularity approach and evaluated against a clear set of KPIs, corresponding to each stage of the product lifecycle. This internal circularity frameworkFor further information, refer to the “Circularity approach” chapter in the ABB Sustainability Report 2022. serves as the basis of our assessment.
4. Pollution prevention and control
   The DNSH criteria require that the economic activity does not lead to the production, use or trade of chemical substances listed in a variety of EU chemical regulations and directives (e.g., EU Regulation 2019/1021 or 2017/852 or Annex XVII of EC 1907/2006, the REACH directive). We implemented a screening and monitoring process for hazardous substancesThe ABB list of prohibited and restricted substances is available on our website. that aims to analyze the compliance of each in-scope site with the relevant EU regulations and directives.
5. Protection and restoration of biodiversity and ecosystems
   In order to verify adherence to the requirements for biodiversity and ecosystems, the relevant sites in or near biodiversity-sensitive or -protected areas were identified (e.g., using Natura 2000). Most of our sites within this scope are certified according to ISO 14001 Environmental Management Systems and ISO 9001 Quality Management Systems, which provided the basis for our assessment, supplemented by additional external data sources.

Minimum safeguards

The minimum safeguards are based on Article 18 of Regulation (EU) 2020/852 and drawn from principles expressed by the OECD, the UN, the Fundamental Conventions of the International Labour Organization and the International Bill of Human Rights.

ABB used a structured assessment to document its compliance with the minimum safeguards. The assessment considered the recommendations for the operationalization of the minimum safeguards as set forth in the Final Report on Minimum Safeguards from the EU Platform on Sustainable Finance (October 2022). Our assessment in 2022 was carried out separately for nine guiding principles: policies, due diligence and risk assessment, addressing impacts and tracking remediation effectiveness, communication, grievance mechanisms, consumer interests, anti-corruption, competition, and taxation.

For further information, please refer to the chapters on “Promoting social progress” and “Integrity and transparency” in the ABB Sustainability Report.

ABB financial and non-financial reporting

ABB prepares its consolidated financial statements in accordance with U.S. GAAP. The EU’s Taxonomy regulation references the KPI disclosure in accordance with International Financial Reporting Standards (IFRS). For the accounting treatment of financial data required for the KPI disclosures, the two standards are largely converged, with the following exceptions:

• Non-order related research and development is expensed as incurred under U.S. GAAP and therefore has been reported as part of the Opex KPI and
• Leases with a term of one year or less are expensed as incurred under U.S. GAAP and not capitalized; therefore, these have also been reported as part of our Opex KPI.

The remaining differences between revenue recognition, tangible and intangible assets, and leases are largely converged, and no material differences impacting the comparability of data would be expected.

The results of our assessment of the Taxonomy eligibility and alignment of our offerings are summarized below. As our Taxonomy alignment is being reported for the first time, figures and comparable information from 2021 are not provided.

The method used to calculate the KPIs for year-end 2022 was based on financial data as available on December 31, 2022.

Taxonomy KPI disclosures

Turnover KPI

The proportion of Taxonomy-eligible and/or -aligned turnover has been calculated as the part of net turnover derived from products and services associated with Taxonomy-eligible and/or -aligned economic activities (numerator) divided by net turnover (denominator) for the financial year ended December 31, 2022.

The denominator is the Group’s net turnover as presented in the Consolidated Income Statements under the line item “Total revenues,” in accordance with U.S. GAAP. To calculate the numerator, we used the activity mapping described above and identified all third-party revenues associated with the Taxonomy-eligible and/or -aligned activities. For the year ended December 31, 2022, 37 percent of ABB revenues were Taxonomy-eligible, and 10 percent of ABB revenues were Taxonomy-aligned under the objective of climate change mitigation. In some instances, we disaggregated revenues by product as well as industry usage to identify the Taxonomy-eligible and ‑aligned turnover.

Large parts of ABB’s business activities are not directly covered by the Taxonomy’s activities, as the current version of the EU Taxonomy regulation is not directly aimed at our sector. Against this background, ABB is Taxonomy-aligned in the following activities:

• 3.1 Manufacture of renewable energy technologies,
• 3.3 Manufacture of low-carbon technologies for transport,
• 3.4 Manufacture of batteries,
• 3.5 Manufacture of energy efficiency equipment for buildings,
• 6.15 Infrastructure enabling low-carbon road transport and public transport,
• 6.16 Infrastructure enabling low-carbon water transport, and
• 7.6 Installation, maintenance and repair of renewable energy technologies.

The majority of our Taxonomy-eligible turnover is reported under Activity 3.6 “Manufacture of other low-carbon technologies.” Activity 3.6 is of increasing importance and covers the manufacture of technologies aimed at substantial GHG emission reductions in other sectors of the economy. When assessing our eligibility under this activity, ABB has strictly filtered the product portfolio for products that directly aim to improve energy efficiency or reduce GHG emissions. These includes products such as energy-efficient motors, drives, turbochargers, measurement and analytics tools and energy-efficient electrical components.

The current “substantial contribution” condition for Activity 3.6 requires that the contribution to GHG emission reductions be measured using a life-cycle GHG emission savings calculation that demonstrates the savings compared to the best-performing alternative technology, product or solution available on the market. For many of our significant electrical and industrial automation solutions, it was unclear how to define the best-performing alternative on the market, as such products are not widely available. The technical screening criteria (TSC) need further clarification, as they do not allow for proper recognition of our electrical and industrial automation solutions.

The detailed proportion of turnover from products and services associated with Taxonomy-aligned economic activities is disclosed page 136 of the report.

Capital expenditure (Capex) KPI

The Capex KPI is defined as Taxonomy-eligible and/or -aligned Capex (numerator) divided by total Capex (denominator) for the financial year ended December 31, 2022. The total Capex used for the denominator includes total additions to tangible and intangible assets before depreciation, amortization and revaluations and impairments, as presented in Note 23 “Operating segment and geographic data” of the Consolidated Financial Statements, and from leases (finance and operating), as presented in Note 14 “Leases,” as well as assets acquired as part of business combinations, as presented in Note 4 “Acquisitions, divestments and equity-accounted companies.” Taxonomy-eligible and/or -aligned Capex used for the numerator includes Capex related to assets or processes that are associated with eligible or aligned activities, and Capex related to the purchase of output for eligible or aligned activities and measures. No “Capex plans” in line with the Taxonomy regulation were considered. 

Within ABB, real estate initiatives and large investments are identified and mapped to the relevant activities at the business area and divisional levels. Capex KPI data collection is coordinated centrally. Investments have been reported under the activity with which the Capex is associated. Against this background, ABB is Taxonomy-aligned in the following activities:

• 3.1 Manufacture of renewable energy technologies,
• 3.3 Manufacture of low-carbon technologies for transport,
• 3.4 Manufacture of batteries,
• 3.5 Manufacture of energy efficiency equipment for buildings,
• 6.15 Infrastructure enabling low-carbon road transport and public transport,
• 6.16 Infrastructure enabling low-carbon water transport,
• 7.3 Installation, maintenance and repair of energy efficiency equipment,
• 7.4 Installation, maintenance and repair of charging stations for electric vehicles in buildings,
• 7.5 Installation, maintenance and repair of instruments and devices for measuring, regulation and controlling energy performance of buildings, and
• 7.6 Installation, maintenance and repair of renewable energy technologies.

For the year ended December 31, 2022, 64 percent of ABB Capex are Taxonomy-eligible, and 14 percent of ABB Capex are Taxonomy-aligned under the objective of climate change mitigation.

Large investments were assessed and analyzed on a case-by-case basis and mapped to the relevant activity. ABB’s real estate function assessed eligible investments in the construction and real estate sector for all activities from 7.1 to 7.7.7.1 Construction of new buildings, 7.2 Renovation of existing buildings, 7.3 Installation, maintenance and repair of energy efficiency equipment,7.4 Installation, maintenance and repair of charging stations for electric vehicles in buildings (and parking spaces attached to buildings),7.5 Installation, maintenance and repair of instruments and devices for measuring, regulation and controlling energy performance of buildings, 7.6 Installation, maintenance and repair of renewable energy technologies, 7.7 Acquisition and ownership of buildings Under Activity 6.5 “Transport by motorbikes, passenger cars and light commercial vehicles,” we have reported all eligible investments made in ABB’s vehicle fleet.

Due to unavailability of data, for all remaining expenditures we allocated Capex according to a factor based on the percentage of eligible and aligned revenue per business division. For example, if 10 percent of the division’s revenues were eligible, 10 percent of the remaining Capex not specifically mapped could be allocated to the activity associated with that revenue. By initially mapping large projects and subsequently allocating the remaining Capex, we ensured there was no double counting of Capex KPIs.

The detailed proportion of Capex from products and services associated with Taxonomy-aligned economic activities is disclosed page 138 of the report.

Operating expenditure (Opex) KPI

The Opex KPI is defined as Taxonomy-eligible and/or -aligned Opex (numerator) divided by total Opex (denominator) for the financial year ended December 31, 2022.

Total Opex used for the denominator consists of direct non-capitalized costs related to R&D, short-term leases (less than 1 year), repairs and maintenance, building renovation projects, and any other direct expenditures associated with the day-to-day servicing of assets including property, plants and equipment.

Direct costs for training and other human resource needs are not included in either the denominator or the numerator.

R&D is based on the line item “Non-Order related Research & Development” in the Consolidated Income Statements. Other corresponding values can be derived from our internal reporting systems but are not directly reconcilable with the figures presented in the Consolidated Income Statements.

Against this background, ABB is Taxonomy-aligned in the following activities:

• 3.1 Manufacture of renewable energy technologies,
• 3.3 Manufacture of low-carbon technologies for transport,
• 3.4 Manufacture of batteries,
• 3.5 Manufacture of energy efficiency equipment for buildings,
• 6.15 Infrastructure enabling low-carbon road transport and public transport,
• 6.16 Infrastructure enabling low-carbon water transport, and
• 7.6 Installation, maintenance and repair of renewable energy technologies.

For the year ended December 31, 2022, 40 percent of Opex are Taxonomy-eligible and 11 percent of ABB’s Opex are Taxonomy-aligned under the objective of climate change mitigation.

The Opex data aggregation was broken into two distinct processes. R&D was allocated to Taxonomy-eligible activities identified in the activity mapping phase described above. R&D managers working on projects not associated with Taxonomy-eligible activities but intended to substantially reduce GHG emissions assessed their eligibility using the criteria under Activity 9.1 “Close to market research, development and innovation” where appropriate. Allocation factors were applied to building renovation projects, maintenance and repair, and any other direct expenditures relating to the day-to-day servicing of real property assets, as well as short-term leases. These expenses were considered for each division and multiplied by the percentage of eligible and aligned revenue in that division. This approach was necessary due to a lack of more granular data on the same basis as described above for the Capex KPI. With this process, we ensured there was no double counting for Opex KPIs.

The detailed proportion of Opex from products and services associated with Taxonomy-aligned economic activities is disclosed page 140 of the report.

ABB assessment results under the EU Taxonomy: 2022 non-eligible, eligible, non-aligned and aligned KPIs

Next steps

At present, the EU has finalized the Climate Delegated Act, which details the technical screening criteria for activities that can make a substantial contribution to climate change mitigation and adaptation. The act focuses on economic activities in the sectors that are most relevant for climate neutrality and climate change adaptation, including energy, manufacturing, transport and buildings.

The EU is soon expected to publish a draft version of the Environmental Delegated Act. This act will address all the activities that can make a substantial contribution under the other four environmental objectives. In addition, the EU plans to release additional activities under the climate change mitigation objective, for which we will assess eligibility and alignment.

Upon release of the Environmental Delegated Act, we will implement a process similar to the above to assess our eligibility. In addition, we plan to implement the required processes and expertise to assess our compliance with the technical screening criteria (TSC) for the remaining four environmental objectives.

We intend to implement all the required processes for the financial year 2024, which is the expected period for mandatory compliance with the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). The CSRD and ESRS aim to standardize sustainability reporting and close the gap between financial and sustainability information, and the mandatory assurance for the ABB Groups sustainability reporting.

Recommendations and way forward

To be effective, the EU Taxonomy needs to take account of all economic activities that play an important role in the transition to net zero. As it stands, the Taxonomy focuses on sectors that are directly responsible for greenhouse gas emissions but takes less or no account of many critical technologies, such as electrical equipment and industrial automation, that are needed to enable a renewable energy system.

The EU Taxonomy also fails to consider the management of electricity consumption, which could be substantially reduced in a short timeframe through the deployment of readily available and cost-effective technologies. For example, upgrading an electric motor to a higher efficiency standard can deliver significant energy savings that recoup the cost of the motor in lower energy bills. The same applies to industrial automation, which in the process industries can deliver energy savings of up to 25 percent.

In summary, we view the EU Taxonomy as a significant step forward in developing a common classification system for sustainable economic activities. However, it should be expanded to include activities and sectors that contribute indirectly, but still significantly, to a low-carbon society – a shortcoming that the EU has acknowledged. ABB recommends and is prepared to support greater private-sector involvement in determining which activities and sectors should be covered.

Climate change is a global challenge that requires a global approach. The end goal should be a common global classification system for sustainable activities that is comprehensive, credible and relevant to the entire world. If the gaps and shortcomings in the EU Taxonomy are addressed, we believe that it has the potential to serve as a model for such a system, as well as an important driver of investment in sustainable development.