EU Taxonomy and its Implementation at Vossloh

As part of the European Green Deal, the EU Commission aims to achieve the transition to a modern, resource-efficient and competitive economy and climate neutrality by 2050. A central component of this is the EU Taxonomy Regulation, a classification system for defining environmentally sustainable economic activities. The regulation, which went into effect July 12, 2020, defines six 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

According to EU taxonomy guidelines, economic activities are “environmentally sustainable” if they

Technical screening criteria are used to determine whether an economic activity meets the first two points. These are currently only available for the first two EU environmental objectives. As a result, these two objectives alone need to be disclosed for the 2021 fiscal year.

The regulations differentiate between “taxonomy-eligible” and “taxonomy-aligned” activities. If activities can be assigned to the taxonomy criteria, they are taxonomy-eligible, regardless of whether the technical screening criteria are met. Activities are taxonomy-aligned if the taxonomy-eligible activities also meet the criteria.

In accordance with the EU Taxonomy Regulation, Vossloh reported for the first time on the share of sales revenues, capital expenditures (CapEx) and operating expenses (OpEx) of taxonomy-eligible and non-

taxonomy-eligible economic activities, respectively.

In the 2021 fiscal year, Vossloh launched a project to implement the taxonomy requirements in relation to the EU environmental objectives “climate change mitigation” and “climate change adaptation.” The project team comprised the CFO of Vossloh AG and experts from the corporate departments Accounting, Sustainability, Controlling and Investor Relations. Procedures and interim results were reported to the full Executive Board on a regular basis.

Vossloh’s business activities were initially assigned to the relevant taxonomy criteria in predefined sorting. Interviews and workshops were then held with relevant contacts and experts from the business units and key Group companies. The aim of these talks was to analyze business activities and to check whether the corresponding taxonomy criteria for the business activities are actually met (alignment test).

The analysis of all activities of the Core Components, Customized Modules, and Lifecycle Solutions divisions revealed that all of Vossloh’s business activities can be assigned to the category “Infrastructure for rail transport” (Section 6.14. of the Delegated Act on the Taxonomy Regulation of June 4, 2021). According to the regulation, this category includes, among others, the construction, modernization, operation and maintenance of railroad lines. The lion’s share of Vossloh’s business involves the manufacture and supply of major rail infrastructure components and systems. In addition, Vossloh offers comprehensive rail-related services, a major part of which involves the maintenance of rails and switches.

Accordingly, the Vossloh Group’s shares of taxonomy-eligible sales revenues, CapEx, and OpEx are as follows.

Sales revenues are defined as net sales revenues in accordance with the IFRS as reported in the comprehensive income statement and therefore relate only to fully consolidated subsidiaries. Further information on sales revenues can be found on page 125 of the annual report.

CapEx comprises capital expenditure in non-current intangible or tangible assets, including those acquired through asset or share deals, as shown in the consolidated balance sheet. Capital expenditure (CapEx) is calculated on a gross basis, i.e. without taking into account revaluations or scheduled, respectively unscheduled amortization.

Operating expenses (OpEx) take into account non-capitalizable expenses recognized in the comprehensive income statement such as research and development, building renovation measures, short-term leasing, maintenance and repair and all other direct expenses from the maintenance of property, plant and equipment to ensure that the taxonomy-eligible assets are ready for operation.

In addition, Vossloh also voluntarily provides an initial indication of taxonomy-aligned sales revenues, CapEx and OpEx. The taxonomy alignment analysis was performed as follows:

Vossloh’s business activities contribute to an accessible and efficient rail network which is a basic prerequisite for the environmentally desirable modal shift to rail. No other mode of transport is more climate-friendly than rail. For the purposes of the Taxonomy Regulation, Vossloh’s business activities as a whole are to be regarded as an enabling activity for climate-friendly mobility. Therefore, Vossloh’s business activities can generally be assumed to make a substantial contribution to climate change mitigation if they meet the technical screening criteria set out in the rail infrastructure category. According to the Taxonomy Regulation, Vossloh’s activities are presumed to make a significant contribution to climate change mitigation only if they are performed on electrified rail lines or on lines for which an electrification plan exists. Rail lines intended only for the transportation of fossil fuels are exempt.

The electrification of rail infrastructure is not Vossloh’s responsibility, and, in some cases, the locations where the products are used are not known. In analyzing whether the criteria for electrification are actually met, Vossloh followed a three-stage process. Initially, the Company assumed that all activities that took place on high-speed lines and in rail-bound urban traffic would make a significant contribution to climate change mitigation, as these lines are generally fully electrified. Secondly, Vossloh analyzed the key individual projects in terms of the electrification of the rail lines. Thirdly, the electrification rate of the relevant country was used for analyzing the remaining projects. The data come from publicly available research and information from official statistical authorities, rail companies and associations. In addition, all activities of the Core Components, Customized Modules and Lifecycle Solutions divisions globally were examined with regard to existing rail lines designed for the transport of fossil fuels. It emerged that no Vossloh activities could be associated with rail lines of this kind.

In analyzing its activities, Vossloh has focused mainly on how its operations contribute to the “climate change mitigation” environmental objective. Activities with a significant contribution to the “climate change adaptation” environmental objective were not identified.

Next, activities classified as mitigating climate change were to be assessed to determine whether they led to a significant degradation of one or more of the above environmental objectives (DNSH criteria). The criteria for the EU water quality environmental objective essentially refers to statutory and regulatory requirements with which Vossloh is obliged to comply. Many of Vossloh’s business activities do not require at all the use of water as a resource, such as the milling and grinding of rails and switches, welding services, logistics or assembly work. Otherwise, the resource is mainly used in Vossloh factories for the surface treatment of products, as a coolant in manufacturing processes and for the production of concrete ties. Contaminated wastewater is treated in the Company‘s own wastewater treatment plants in such a way that it meets the discharge standards of the public water supply at a minimum.

With regard to the “transition to a circular economy” environmental goal, Vossloh products meet long durability and longevity requirements, as most components are designed for a particularly long service life and can be recycled and reused at the end of their useful life. In addition, the Lifecycle Solution division’s service portfolio extends the service life of rails and switches.

Vossloh also complies with the EU environmental goal of “preventing and reducing environmental pollution.” In addition, a large number of Vossloh products and services contribute to the reduction of track noise and vibrations (see also the “Track noise reduction” section on page 88).

Regarding the EU “Protect and restore biodiversity and ecosystems” environmental objective, environmental impact assessments (EIA) and comparable reviews are conducted by Vossloh where such a requirement exists. Vossloh is generally not subject to the EIA obligation when manufacturing products. Finally, by boosting track availability and enabling greater traffic through this land use, Vossloh is helping to minimize the land required for the construction of rail infrastructure, thereby contributing to the preservation of biodiversity.

Based on this approach and the above assumptions and estimates, the Vossloh Group’s taxonomy-aligned sales revenues, CapEx, and OpEx are as follows: