The EU Taxonomy is a normative document that establishes the types of economic activities that contribute to the achievement of environmental goals. The criteria used in it help identify companies, investors, and financial market participants whose activities can be considered “sustainable”.
The EU Taxonomy requires most financial and non-financial companies in the EU to declare the environmental sustainability of their economic activities. For this reason, it is essential to be aware of how the EU Taxonomy works and also to understand why meeting these criteria is of high importance. You can also read about the connection between social and environmental taxonomy here, as this also affects the valuation of the company.
What is EU Taxonomy?
The EU Taxonomy was developed by a group of technical experts established by the European Commission. This is a white paper that has been developed in consultation with over 200 industry experts and scientists. The aim is to provide both corporate and investment companies with clarity on the level of environmental friendliness of certain activities and to attract more capital to finance economic activities that are more environmentally friendly.
What are the goals of the EU Taxonomy?
EU Taxonomy is one of the key tools that European legislators use to:
- creating common definitions for sustainable activities and investment practices;
- providing clarity on what is required in specific sectors to meet commitments made under the Paris Agreement;
- placing environmental data in context, creating a cohesive set of expectations to require taxonomy alignment;
- encouraging companies that follow the direction set by this evidence-based framework, allowing investors to compare financial products that promote or represent environmental characteristics.
Reasons to start aligning with EU Taxonomy right now
A company’s compliance with the requirements set out in the EU taxonomy provides it with certain advantages. Let’s take a look at them.
Official requirement
Compliance with the EU Taxonomy is mandatory for many financial and non-financial companies in the EU. Businesses that are focused on the promotion of financial products in the European market, as well as companies that fall under the Non-Financial Reporting Regulation (NFRD), are required to comply with the requirements of the EU Taxonomy.
Depending on the type of activity of a company that wishes to comply with the rules of the EU Taxonomy, different data disclosure specifications apply to it. For example, financial institutions must disclose the extent to which they apply the requirements of the EU Taxonomy, what environmental objectives need to be achieved with investment funds, and what percentage of core investments comply with the EU Taxonomy.
Non-financial companies are required to disclose financial indicators that comply with the EU taxonomy, as well as information on how they comply with social guarantees and whether they have a negative impact on any environmental objectives. This information must be presented in the company’s non-financial report, as well as the annual report or a separate sustainability report.
Reputation and risks
The company’s disclosure of information about compliance with the EU taxonomy requirement allows other market participants to assess the actual impact of the company on the environment, as well as the results of economic activities in the field of environmental protection. Thus, the EU taxonomy is focused on providing investment professionals with transparency in these matters, as well as protection from greenwashing claims.
The degree to which a company’s activities comply with the EU taxonomy can affect its reputation. A significant contribution of the company to the achievement of environmental goals will have a beneficial effect on the reputation of the business and will increase the number of investors. Low taxonomic consistency can have the opposite effect.
A company’s compliance with the EU Taxonomy can help reduce risks in supply chains. A single language and common criteria for the supply chain are focused on mitigating failures and delays, as well as improving supply chain resilience.
Attractiveness for investors
Financial institutions that plan to increase investment in taxonomy will look for companies that meet these requirements. Companies must assess the level of compliance with the requirements of the EU taxonomy on their own. They must also self-disclose information about it. If the company does not provide such information, then the investor must evaluate its performance on its own, which leads to additional work. Thus, an institution that seeks to invest sustainably is more likely to choose a company that has disclosed the conformity of its economic activity with the EU taxonomy.
Deep understanding and room for improvement
Companies that evaluate their economic activity using the algorithms proposed by the taxonomy have an excellent understanding of how effectively their actions achieve environmental goals. This assessment allows companies to see the achievements of other companies and set new goals to improve their own performance.
The assessment allows companies not only to achieve better alignment with the EU taxonomy but also to find even better ways to achieve environmental goals.
The Platform for Sustainable Finance presented by the EU is in charge of keeping the technical criteria for company scrutiny up to date. This ensures that the metrics used to evaluate and benchmark companies are up-to-date and in line with new sustainability claims.
Improvement of resilience
Increasing resilience is the main key to securing the company in the future. Consistency with the EU taxonomy indicates the readiness of the company to develop and introduce new methods of solving problems. This reduces the uncertainty of investors in a particular company and generally has a beneficial effect on the value of shares and bonds of the company. Evaluation of the company’s activities for compliance with the requirements of the EU taxonomy allows businesses to identify potential risks, and measure the impact of certain factors on their activities.
Taking proactive steps towards alignment with the EU taxonomy can help businesses ensure that, for example, climate change does not interfere with certain company goals. Consistency will also help companies provide assurance that initiatives or programs do not inadvertently increase vulnerability to a particular hazard. However, consistency can also provide opportunities to make future developments and programs resilient to climate change and other risks.
Resilience is the key that enables companies to take proactive, forward-looking steps to achieve sustainable behavior. Consistency with the EU taxonomy allows companies to increase resilience while creating overall confidence in the results among shareholders, investors, and customers.
Final thoughts
The consistency of the company with the EU taxonomy allows it to increase its reputation, attract new investors, and define new goals and ways to achieve them. If you need help with compliance with the EU taxonomy, then Celsia will help you sort out all the necessary issues.
