EU Taxonomy – Critical insights for an evolving framework

In brief, describe your background and how you initially became familiar with the taxonomy!

As an ESG advisor focusing on sustainable finance, it has been a natural thing to follow the developments of both the taxonomy and closely related regulations from the beginning. At an early stage of the taxonomy development, I started to create comprehensive education material about the taxonomy reporting. My colleagues and I have informed and coached over one hundred companies from different sectors on how to report according to the taxonomy. This has motivated us to continuously keep an eye on the development of the taxonomy, down to the concrete details.

What are your impressions so far?

The taxonomy is in many ways a good instrument, contributing to a much needed concretisation of the ESG. The way that the taxonomy ties financial metrics and ESG criteria together is another important development in my opinion. Furthermore, we must remember that the framework is still in a relatively early developmental phase, which results in ambiguities and in some cases shortcomings when it comes to the logics of it. This will require fixing. Hopefully, the user experience can be improved with continuous evaluation of the framework.

What effects do you expect from the taxonomy on IPO companies?

During the implementation and adaptation of the taxonomy within companies, many realise that this framework is more closely related to the core actions of the companies than more classical sustainability reporting. There is now a larger focus on analysing the capital flows when questioning whether the financial turnover of companies stems from sustainable activities and if investments and costs are channeled in a sustainable direction. This effect should not be underestimated, as it will drive ESG integration.

And for remaining companies?

The taxonomy sets a new standard for ESG and sustainability analyses. Also companies without a formal obligation to follow the framework can benefit from relating to the foundational principles of it in strategies and product development. Additionally, there is a large “rippling down” effect, and we do already see how many companies without a formal requirement to follow the taxonomy still receive questions on it from owners, investors and customers.

What advice do you have for non-IPO companies regarding the taxonomy and their sustainability actions?

To all companies: focus on the value creation and assure to minimise the side effects. The taxonomy can, if handled correctly, be a resourceful instrument on the journey towards sustainability.

Some resistance to the taxonomy has emerged. What are your opinions on that?

The taxonomy is new and new things will be met with some resistance. Some of the critique, I understand. The reporting burden can become unreasonable for some companies, and for other sectors or businesses there is a lack of logic present in the taxonomy. This needs to be addressed.

But, it is important to remember that the taxonomy is supposed to drive further development. It is therefore not particularly surprising that many criterias reach higher than the current laws and regulations. Criterias are not obligatory to follow, they are after all just criterias which shows what you need to do in order to operate a business in alignment with the taxonomy. These perspectives have sometimes been a bit misunderstood in the debates on the taxonomy.

The taxonomy is still relatively new, what do you think will be the next step?

There are several ongoing discussions about expansions of the taxonomy, but whether any of them will be realised is yet to be decided. The main focus moving forward will probably be to gather the full picture of the taxonomy and closely related regulations – the Disclosure Regulation and its RTS, the CSRD, and all modifications that can come with the directive and the obligatory regulation on due diligence. Combine all these new regulations and I would argue that the foundation for a completely new way of viewing ESG integration both at a company and investment level is set. The implementation will probably be confusing the first few years, but with time I think we will have a functioning structure established to handle the intricate relationship between value creation and the impact on people and planet.

Read more about our solution for applying the EU Taxonomy in your sustainability strategy.