In order to meet its 2030 climate and energy targets as defined in the European Green Deal, the European Commission has set out to align definitions, reporting and companies’ objectives with its Taxonomy for sustainable activities. It is a list of economic activities with performance criteria to assess the activities’ contribution toward six environmental objectives aiming to achieve EU toward climate neutrality by 2050:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
EU is however not the only region aiming to achieve its targets by putting more scrutiny on the companies. Other regions, including Canada, Japan, Malaysia, Singapore, ASEAN and the UK are all proceeding in the similar direction and are on a path to establishing their own taxonomies.
What does it mean for companies?
Companies will be more scrutinized not only from the perspective of their Balance Sheets, P&Ls and Cash Flows but thanks to the Green Taxonomy and the CSRD also from the perspective of:
1) They provide a substantial contribution to at least one of the six environmental objectives above. In other words if they generate revenue from Green Products and Services.
2) “Do no significant harm” (DNSH) is caused to any of the other environmental objectives. Meaning if the company invests in machinery or equipment that will make it more sustainable.
3) Compliance with robust and science-based technical screening criteria, i.e. if the company complies with reporting standards and follows the right rules..
4) Compliance with minimum social and governance safeguards. Referring to the fact if the company spends money to lower the CO2 footprint of its operations.
All of the above are aimed at extending the investor and public perspective about sustainability from mere CO2 reduction commitments to a pure change of business models. Large polluters like Oil companies will thus not be able to score well unless their operations will start shifting to a more sustainable business model. As a consequence, future-discounted assets valuations of such companies will decrease unless they will conduct the needed change.
Who will be affected?
The requirements affect both companies and even more importantly financial market players.
Financial and Non-Financial Companies: large public-interest companies with more than 500 employees, covering approximately 6,000 large companies and groups across the EU.
Financial market participants who offer financial products: All the financial market participants will be required to disclose information on how and to what extent the investments that underlie their financial product support economic activities that meet all the criteria for environmental sustainability under the Taxonomy Regulation.
What are the benefits?
The EU Taxonomy for sustainable activities is a great way forward thanks to the alignment of definitions, requirements, reporting and thanks to exerting more pressure on investment and consequently business model decisions. EU is a leading voice on the sustainability front which should not only secure its world leading position but also, even more importantly, safe our planet.