The EU is working on uniform criteria for environmentally sustainable economic activities. The motivation behind establishing the EU Taxonomy is to enhance investor confidence: when companies make claims regarding the responsibility and sustainability of their products or investments, investors should be able to trust these claims are scientifically accurate and objectively screened. At first, the criteria will focus on climate change mitigation and adaptation, but over the years, they will expand to other environmental themes as well.
Only a fraction of the EU’s economic activities can fit under the definitions of the taxonomy during the first stages. This is due to the intentional strictness of the criteria. It is not enough for activities to rise above the average in being environmentally friendly; they must provide significant environmental contributions.
Because the criteria have not been fully approved, no final assessment of their coverage is yet available. The European Securities and Markets Authority (ESMA) has estimated that only about 1.4% of the equity and corporate bond holdings in EU fund portfolios will be aligned with the taxonomy.
As might be expected, businesses are worried over the narrowness of the definitions and criteria. Does being left outside mean that the business is considered unsustainable, detrimental and undesirable by investors?
I argue that no one fully acquainted with the taxonomy regulation will think so. First of all, a business can produce many services and products with tangible value for the society, even if it isn’t especially environmentally friendly.
Secondly, to successfully curb climate change, we should not focus only around the 1–2% of businesses with the lowest carbon emissions. We should focus on the biggest sources of emissions and find ways to cut down these emissions.
A responsible investor should not be satisfied with cleaning their own portfolio of “detrimental” businesses. Positive results are made when the investor steers, encourages and, if necessary, wields shareholder influence to demand the company to change in a more sustainable direction. Large investors and lenders have voting power in board meetings, and they can also exercise power in the terms and conditions of their financing.
Positive results are made when the investor steers,
encourages and, if necessary, demands the company to change
in a more sustainable direction.
The EU Taxonomy will in the future determine what investments can be labelled sustainable. This will still leave room for the financial sector to identify and tailor sustainable finance solutions even when the applicant for funding does not fulfil the taxonomy criteria.
If the activities of your company do not match the first criteria of the EU Taxonomy, there’s no need to throw in the towel. Instead, think on what areas of sustainability you can affect. Promoting wellbeing in society, for example, is very much in line with sustainable development objectives, but it has not yet received its own detailed criteria. A company that recognises its capacity to make a difference and is both willing to develop its activities and monitor them through quantifiable indicators is without doubt an attractive target for many investors.