EU Taxonomy: How it drives business sustainability by making investment easier

Investing to drive business sustainability with EU Taxonomy

It is a widely accepted truth that the stakeholders with the most power to drive sustainability in businesses are the investors.

As owners and sources of funds for businesses of all sizes, the demands made by any investor towards achieving business sustainability is likely to have more weight than most. And if you are an investor looking to make sustainable investments, it is likely that you will need to look at businesses that already have some amount of sustainability integration.

There are many ways to ensure that your investments are in sustainable businesses. For larger, institutional investors, joining the PRI as a signatory and following the principles is a good way to achieving business sustainability. However, for smaller investors who may be looking to invest directly in businesses, joining the PRI may not be the most efficient option.

For private investors who care about sustainability, choosing where to invest is going to be a challenge. There may be businesses that claim to be sustainable when in reality they are not.

It is easy to fall prey to smart marketing campaigns from unsustainable businesses that embellish every tiny achievement they have. Greenwashing is certainly a real challenge and one that can deceive private investors.

It is here, in this context, that the need for a simpler way of identifying sustainable businesses become most pronounced.

EU Taxonomy aims to solve this issue, by providing a classification system that helps determine whether an economic activity can be considered environmentally sustainable. 

How EU Taxonomy will drive change

EU Taxonomy is primarily a tool to help promote sustainable investment in the EU. It helps investors identify the businesses that are environmentally sustainable based on a few performance thresholds for specific economic activities that meet certain criteria.

EU Taxonomy maintains performance thresholds for economic activities which:

1. Make a substantive contribution to one of six environmental objectives
2. Do no significant harm (DNSH) to the other five, where relevant
3. Meet minimum safeguards (for example, OECD Guidelines of MN Enterprises and UN Guiding Principes on Business and Human Rights)

These performance thresholds will not only help investors identify businesses that are already sustainable, but also helps businesses access investments to become more sustainable. Together, this will help reduce carbon emissions of these high carbon industries and simultaneously grow low-carbon industries.

EU Taxonomy Objectives and how they contribute to environmental sustainability

EU Taxonomy has 6 objectives for environmental sustainability, which are as follows:

Climate change mitigation

Perhaps the broadest and most urgent objective, mitigation of climate change through sustainable business practices is at the forefront of EU Taxonomy.

We have already begun feeling the adverse impacts of climate change, with heatwaves in North America and wildfires in several countries. It is vital that businesses, who have more control over global emissions than most other entities, take action to mitigate the negative impacts that contribute to climate change.

Climate change adaptation

For this objective, the amount of investment that is required to adapt businesses to adapt to climate change is considered.

Any business that is taking active steps to adapt its activities to become more environmentally sustainable may be making a substantial contribution towards achieving this goal. Any business that makes a substantive contribution in the form of its resources towards adapting it for climate change objectives is closer to meeting the performance thresholds.

Other objectives 

So far, the screening criteria for only the first two have been established. The remaining four criteria are set to be established by the end of 2021 and be put into practice by 2023.

These four remaining objectives that are yet to be fully developed are as follows:

1. Sustainable use and protection of water and marine resources
2. Transition to a circular economy
3. Pollution prevention and control
4. Protection and restoration of biodiversity and ecosystems

EU Taxonomy being put into effect

Even though not all the objectives are fully developed, EU Taxonomy has already been put into effect. Financial institutions that are in the EU are expected to adopt the first two objectives by the end of 2021 and non-financial companies, throughout the year 2022.

This is essential, because of the urgency of the climate issue. Net-zero is no longer a distant goal that businesses can worry about later. In fact, now it is a binding goal that has to be adopted by all businesses and organizations in the EU by 2050. 

And there are more immediate goals to be achieved as well, with a reduction of 55% targeted to be achieved across the EU by 2030.

How will the EU Taxonomy affect your business? 

If you do not operate anywhere in the EU, you are unlikely to see any direct impact of the EU Taxonomy in your activities or prospects.

However, with the development of the taxonomy along with the other higher-level agreements and regulations, the EU has now become the worldwide leader for driving immediate climate action through regulation. And it can have a significant impact on your business, even if you are not in the EU.

Your business will have to become sustainable to do business with EU companies

It is likely that as businesses in the EU become more sustainable as a result of the taxonomy’s impact, they may also begin to pay closer attention to their value chain. This means if you want to do business with any company that has to follow the EU Taxonomy’s objectives, you’ll have to align with them too.

Other regulatory bodies may follow the lead of the EU 

Other regional or national governing bodies may follow the lead of the EU Taxonomy and drive similar levels of action among businesses that operate under their jurisdiction. Other markets such as Canada, Japan and the United Kingdom are already in the process of developing their own taxonomies.

Given the increasing awareness of climate change, this is only a matter of time. And making small changes that contribute towards aligning your business with the taxonomy as early as possible is a smart way of avoiding the risk of having to make major immediate changes.

Investors will look into how a business align with the taxonomy

EU Taxonomy, being a science-based classification system will make it easier for investors to objectively view the sustainability of businesses and how they align with the taxonomy. Disclosure of climate data will become increasingly important to businesses as they try to attract investors.

Any business that lags behind also risks investment and funding from climate-conscious investors.

Even if you are not a European business, you will struggle to attract investments from the EU if you do not align yourself with the objectives. For non-EU businesses, aligning themselves with the EU Taxonomy is not a question of regulation or mandate. Rather, it is a factor that can have a significant effect on their activities as well as attractiveness to investors.

What should you do if you need help with the EU Taxonomy?

Even for the initiated, EU Taxonomy presents a complex framework and is certainly a challenge for most businesses.

The biggest reason for it being a challenge is its immediate nature. Businesses do not have several years to learn and contemplate what the objectives mean for them. The actions demanded by the taxonomy are far more immediate, with reporting set to begin as early as January 2022.

And because of this, it is normal for most businesses, especially those that do not have large teams dedicated to sustainability reporting, to feel overwhelmed. However, there is no reason to fret.

The European Union’s webpage for the taxonomy already has simple resources and guidelines on the importance as well as the use of the EU Taxonomy. It does require a significant time commitment to understand and implement it, but it is by no means an impossible task.

However, if you wish not to spend your resources on the taxonomy itself, there is always the option to work with those that do.

SUSTINARO believes in sustainability that makes sense. We begin to make sense of sustainability through the communication of business sustainability to the stakeholders. And we can help your business align itself with the EU Taxonomy and identify any need for action.