6.3 EU Taxonomy

Over the past years, the European Parliament and the European Commission have worked on regulations for non-financial reporting (EU regulation 2020/852, also known as the Taxonomy Regulation (the ‘Taxonomy’)).

This regulation establishes a framework to facilitate sustainable investment. The Taxonomy is essentially a classification of economic activities based on their contribution to achieving specific climate and environmental objectives. The aim of the Taxonomy is to enhance transparency and comparability. Tying in with the climate targets from the Paris Climate Agreement, the Taxonomy establishes the following environmental objectives:

1. Climate change mitigation;

2. Climate change adaptation;

3. The sustainable use and protection of water and marine resources;

4. The transition to a circular economy;

5. Pollution prevention and control;

6. The protection and restoration of biodiversity and ecosystems.

For objectives 1. and 2. both the eligibility and alignment with the Taxonomy's criteria were assessed for Nedap’s activities in 2022 and 2023. This assessment encompassed validating all relevant 'Do No Significant Harm (DNSH)  requirements against the said activities. The current financial year introduced a notable expansion in the Taxonomy's scope, encompassing the remaining four environmental objectives 3. through 6. as well as expansion of 1. and 2. For these newly incorporated objectives, the reporting requirement is currently focused on determining their eligibility. This development reflects the EU's ongoing commitment to broadening the ambit of its sustainability framework, ensuring a more holistic approach to environmental governance.

Climate change objectives

An economic activity is classed as an economic activity that substantially contributes to climate change mitigation if, in line with the long-term temperature target from the Paris Agreement, it substantially contributes to the stabilisation of concentrations of greenhouse gases in the atmosphere at a level where hazardous anthropogenic disruption of the climate system is prevented, by preventing or reducing greenhouse gas emissions or increasing greenhouse gas removal, including through process or product innovation. Making a building climate-neutral is an example of such an activity.

An economic activity is classed as an economic activity that substantially contributes to climate change adaptation if it involves solutions that substantially reduce the (risk of) adverse effects of the current climate and the expected future climate on that economic activity. Or if that activity directly facilitates other activities that contribute substantially towards achieving one or several of the objectives. Earthquake-proofing or flood-proofing a building is an example of such an activity.

Besides contributing to countering or dealing with climate change, the activity must not do significant harm to the other defined environmental objectives. Certain minimum safeguards must also be in place to guarantee compliance with the OECD guidelines for multinational enterprises and the UN’s guiding principles on business and human rights, including the principles and rights described in the eight fundamental conventions in the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work and in the International Bill of Rights.

Environmental objectives

The 4 new objectives collectively aim to establish sustainable ecosystems by integrating responsible water management, waste minimisation, pollution reduction and biodiversity conservation, ensuring a holistic approach to environmental sustainability and ecosystem resilience. Contribution to one or more environmental objectives must not do significant harm to any of the other environmental or climate change objectives.

Scope of the Taxonomy

The rationale behind the selection of activities currently identified in the EU Taxonomy is primarily based on their potential to contribute significantly to the European Union's climate and environmental objectives, particularly in the context of the European Green Deal and the bloc's commitments to the Paris Agreement. These activities are identified for key sectors where substantial sustainable impact can be made. The focus is on sectors that either have high potential to reduce greenhouse gas emissions, are crucial for adaptation to climate change, or are vital for protecting water and marine resources, transitioning to a circular economy, preventing pollution and preserving biodiversity and ecosystems.

The activities that the European Commission has identified mainly concern industries other than the sectors in which Nedap operates, i.e. industries with a greater emission reduction and environmental contribution potential. This is the reason for having a relatively low eligibility percentage, compared to companies that fall within the defined sectors.

Relevance to Nedap in 2023

Climate change

The focus areas that the EU has designated for reporting on environmentally sustainable economic activities were initially found mainly, albeit not exclusively, in sectors in which Nedap does not operate, such as forestry, construction, heavy industry, energy generation, water supply, waste processing and transport. In 2023 activities in various sectors were added, notably in the automotive and aviation industry. The information and communications sector remained the most relevant Taxonomy domain for Nedap. This sector can substantially contribute to preventing climate change by developing data-driven solutions that are used primarily to provide data and analyses that enable reduction of greenhouse gas emissions. Hosted solutions in energy-efficient data centres can also contribute if the operations of a data centre meet the defined energy-efficiency standards.

The following activities are considered the most relevant for Nedap from a Taxonomy point of view:

• 6.5  Transport by motorbikes, passenger cars and light commercial vehicles.

• 7.X  Renovation of existing buildings, installation, maintenance and repair of energy-efficiency equipment, installation, maintenance and repair of charging stations for electric vehicles in buildings (and parking spaces attached to buildings).

• 8.1  Data processing, hosting and related activities.

Activities related to numbers 6 and 7 involve buying goods or services that meet environmental standards. They also include actions that make the main activities more environmentally friendly or reduce the company's own greenhouse gas emissions. Activity 8 focuses on offering environmentally friendly products and services to customers.

While the regulation highlights specific manufacturing activities that can contribute to climate change mitigation, such as 3.5 ‘Manufacture of energy-efficient equipment for buildings’ and 3.6 ‘Manufacture of other low carbon technologies’, Nedap's involvement in these areas is not in manufacturing itself. Instead, the company focuses on researching, designing, developing, marketing and selling products within these categories. The actual production process of these products is entrusted to specialised Electronic Manufacturing Service companies, which makes Nedap not eligible under said manufacturing activities of the Taxonomy. This approach allows Nedap to concentrate on its core competencies while leveraging the expertise of our manufacturing partners.

Environment

Environmental objectives are currently targeted at activities relating to water leakage control, waste treatment, pharmaceutical products, nature conservation & restoration and sustainable manufacturing (and related services). Only the last category, defined in detail in Annex II ‘Transition to a circular economy’ of the Technical Screening Criteria, encompasses economic activities that Nedap performs.

In the context of the Taxonomy, Nedap is positioned to potentially contribute to a circular economy through the following identified activities:

• 1.2  Manufacture of electrical and electronic equipment

• 5.1  Repair, refurbishment and remanufacturing

• 5.5  Product-as-a-service and other circular use and result-oriented service models

Revenue of activity 5.5 is realised through datacentres (Climate Change Mitigation activity 8.1). To avoid double counting it is not being reported on as a circular activity

Revenue

Climate change

Activity 8.1 is a climate change mitigation (‘CCM’) economic activity, the other 3 environmental activities contribute to a circular economy (‘CE’). The Taxonomy classes CCM8.1 as a transition activity that contributes to climate change mitigation if it is performed through data centres (‘The storage, manipulation, management, movement, control, display, switching, interchange, transmission or processing of data through data centres, including edge computing (decentralised data processing)’). These data centres’ greenhouse gas emissions must be aligned with best practices in the sector or industry.

The revenue that Nedap generates from software subscriptions (licences) and services (€84,127k in 2023, note 14 of the consolidated financial statements) which is largely (€77,855k) made up of economic activities performed through data centres, is an important activity for the company since most of its recurring revenue is generated through these data centres. The data centres that Nedap uses the most, all meet the European code of conduct for energy efficiency in data centres, demonstrating part of the alignment criteria. Alignment cannot be established for a small number of data centres, specifically the hosting by Amazon Web Services (AWS) and Microsoft (Azure), as these providers' facilities are not always individually identifiable to Nedap. This makes it difficult to establish how well the limited services provided to Nedap adhere to environmental standards. Both AWS and Azure have, however, committed to transitioning to 100% renewable energy by 2025

When it comes to the part of the activity that is aligned with the technical screening criteria (€74,326k) set in the Taxonomy, it was established that this activity does not significantly harm climate change adaptation, sustainable use and protection of water and marine resources, pollution, biodiversity and the transition to a circular economy.

This was assessed by validating all technical screening criteria against compliance with the substantial contribution  and do no significant harm criteria:

• The activity  has implemented all relevant practices listed as ‘expected practices’ in the most recent version of the European Code of Conduct on data Centre Energy Efficiency, which has been confirmed by an independent third-party. ISO 14001 and ISO 50001 certificates are provided.

• No significant harm is done to climate change adaptation, which was the outcome of an assessment of climate related hazards.

• The sustainable use and protection of water and marine resources was assessed against the criteria relevant to this objective, and confirmation was received from those centres that align with this criterium.

• Regarding the transition to a circular economy no significant harm was established by validating the certification requirements as stated in Directive 2009/125/EC, the absence of restricted substances as per Directive 2011/65/EU and the waste management plan that is in place that ensures maximal recycling at end of life electrical and electronic equipment.

Nedap has also established compliance with the minimum safeguards as required by the EU. Compliance involves establishing adequate human rights due diligence processes, implementing anti-corruption measures, ensuring tax governance and compliance, and promoting awareness of competition laws among employees. Details of the aforementioned can be found in section 3. ‘Risk & Governance: how we safeguard value’. This adherence is in line with the criteria outlined for EU companies, ensuring we do not fall into non-compliance by violating labor laws, engaging in corrupt practices, mismanaging tax responsibilities, or breaching competition laws.

The remainder of the revenue (€178,299k, as detailed in note 14 Products, Systems and Installations in the consolidated financial statements) stems from activities that have not been classified by the European Parliament as directly contributing to climate mitigation or adaptation. Many manufactured products are considered eligible for climate objectives only if their primary aim is to reduce greenhouse gas (GHG) emissions. While Nedap's range of energy-efficient products does support the reduction of GHG emissions in many customers’ operations, this is not their primary intended purpose.

Nedap continuously conducts life cycle assessments for all of its hardware products, refining the assessment for its major product groups in 2023 (see section 2.3, paragraph ‘Our impact: Products’). The activities performed using Nedap products are intended to, among other things, reduce waste streams at retailers, boost food efficiency at agricultural companies and prevent the use of chemicals in water purification. In Nedap’s view, they contribute to facilitating its customers in transitioning to a more sustainable organisation and society. Information on how our customers use these products, which would be needed to be able to establish a demonstrable contribution towards one or several of the EU-defined environmental objectives, is currently not reliably available. Nedap’s contribution towards customers’ sustainability objectives is, therefore, captured in qualitative terms. Revenue from products, systems and installations has, therefore, not been designated as a Taxonomy-eligible activity contributing to climate change mitigation or adaptation.

Environment

Upon evaluating the three new activities identified for potential contribution by Nedap, it was concluded that activity 1.2, 'Manufacture of Electrical and Electronic Equipment', has the most relevance to Nedap under environmental objectives as repair activities (activity 5.1) are of limited size and product-as-a-service offerings (activity 5.5) are included in climate change mitigation activities due to the fact that these activities are predominantly related to software-based solutions. The hardware component plays a minimal role within these activities.

Activity 1.2 'Manufacture of Electrical and Electronic Equipment' encompasses the manufacturing of Nedap's products that have not been outsourced to third parties. These products are not related to low carbon technologies or energy-efficiënt equipment and therefore do not qualify under climate change mitigation criteria. The manufacturing of said products is, however, an activity that could potentially contribute to circular objectives and is thus included here.

Although activity 5.1 ‘Repair, refurbishment and remanufacturing’ is insignificant in terms of revenue generation it does contribute to circular objectives. Nedap’s products are built to last, with a robust design and extensive durability testing prior to delivery. Only very limited number of products return to Nedap for repair. If they do, Nedap’s excellent warranty policies entitle customers in most cases to a repair, refurbishment or replacement at no cost.

Capital and operating expenditure

All the listed Taxonomy categories that are relevant to Nedap involved capital expenditure in 2023. This expenditure and the associated operating expenditure is shown in the tables at the end of this section.

The following table, detailing percentages of total revenue, investments and CapEx-related operating costs, is confined solely to activities where alignment with the Taxonomy is being reported on. It therefore does not encompass activities that, as of 2023, are subject to only eligibility reporting:

Capital expenditure

Eligible investments in fixed assets are related primarily to hosting activities. This includes investments that are part of a CapEx plan to allow Taxonomy-eligible economic activities to become Taxonomy-aligned. This plan sees to the migration of activities hosted in data centres that are not aligned with the Taxonomy to those that are. Further investments related to this CapEx plan, that ends within 18 months of the end of financial year, are limited.

Contrasting with the significant renovations conducted in 2022 on some of Nedap's oldest buildings, our ongoing efforts to decarbonize the buildings at our Groenlo Campus have encountered an unanticipated setback. The inability of regional and national grid operators to upgrade our power connection creates additional challenges in achieving our net-zero ambition. Increased green electricity is vital for our continued investments in vehicle charging facilities and the scaling down of fossil energy consumption at our facilities. Pending an expanded electricity capacity the planned initiatives to reduce our scope 1 emissions had to be temporarily postponed.

Individual capital expenditure, not related to taxonomy-aligned turnover, but contributing to a reduction in greenhouse gas emissions relates to investments in our buildings and installations and the electrification of our fleet of vehicles, including the installation of charging facilities on Nedap premises and at employees’ homes. Nedap offers a home charging point for every employee with a PHEV or fully electric car.

Ineligible investments include investments in the modernisation of facilities and workplaces at our sites, most right-of-use leases, moulds/dies and capitalised development costs for activities that are not part of activities eligible under the Taxonomy.

The introduction of eligibility reporting on environmental objectives results in an additional disclosure of the related capital expenditures as well. Potential contributions to a more circular economy make the investments in activities that manufacture electrical or electronical equipment eligible for Taxonomy reporting. The eligible CapEx for these activities includes investments in buildings, machines and measuring and testing equipment at our own manufacturing facilities.

Operating expenditure

The operating costs to be assessed under the Taxonomy are direct non-capitalised costs relating to research and development, building renovations, short-term rentals, maintenance and repairs, and all other direct expenditures relating to the day-to-day maintenance of tangible fixed assets and equipment by the company or a third party engaged for these purposes, which are needed to guarantee the continuous and effective functioning of such assets. Given that Nedap has been investing in greening its buildings and other assets for years, these assets are relatively new and involve limited operational costs. These are mainly operating costs for hosting activities, maintenance of Nedap’s fleet of vehicles, and costs relating to the correct (continued) functioning of installations in the various buildings on Nedap’s Campus. Buildings of subsidiaries are all leased assets and the correct and effective functioning of these does not come with additional operating expenditure for Nedap.

Based on the accounting policies cited in the consolidated financial statements, the percentages listed have been calculated as the revenue (detailed in note 14 of the consolidated financial statements), investments in fixed assets (detailed in notes 1 and 2 of the consolidated financial statements), and operating costs that qualify under the Taxonomy, as part of the total revenue, investments in fixed assets, and the total aforementioned direct non-capitalised operating costs.

Nedap has made an effort to include all eligible activities in its disclosures. Only when an activity is deemed of limited size and importance to Nedap it is not being reported on.

Conclusion

Given that the EU primarily focuses on sectors other than the ones in which Nedap operates, i.e. sectors with greater contribution potential, the share of Taxonomy-eligible activities could stay limited. We are committed to enhancing our positive contribution and reducing any negative impacts across all markets we serve. This commitment often extends beyond the range of activities identified by EU legislation, which might not align with the core of our business. We are focused on delivering sustainable and advantageous solutions, even in areas not expressly emphasised by current governmental policies. Our dedication encompasses a broad spectrum of sustainable goals, including those that might fall outside the activities specified by the EU.

Taxonomy disclosures