What is the EU taxonomy and why is it important?

What do SMEs gain from taxonomy?

Even though the taxonomy is currently not mandatory for the majority of companies, it is still noteworthy for many reasons. It is an excellent tool for those companies who wish to be part of the solution to the global climate crisis and the green transition.

The taxonomy provides companies with strategic information and added value – it is as if the taxonomy represents an expert of sustainable development in an investment planning project. It is up to the companies to decide whether or not they already want to be a part of this inevitable development. However, sustainable decision-making will be a lifeline for companies, and the pressure coming from stakeholders steers towards solutions that conform to the taxonomy with full speed.

Companies should, at the very least, try not to make investments that do not take the taxonomy into account at all, as that can be short-sighted amid the current environmental challenges. In the future, the taxonomy will affect a major part of companies, so it is wise to prepare for its arrival now by adapting your business to comply with the taxonomy.

The financial sector must assess risks – including environmental risks

The taxonomy helps companies to understand and increase their knowledge of how significant matters like climate change, biodiversity and the well-being of ecosystems really are. If these issues are not counted in in the decision-making of financial institutions and companies, the associated risks will sooner or later materialize and become very costly.

In other words, the taxonomy itself does not differ from the basic function of the entire financial industry: investors assess risks, put a price tag on them and allocate where it makes the most sense to invest capital. Risk assessment is and always has been a key player in investor decision-making. The fact that environmental risks are getting more attention along with the taxonomy, does not diminish the importance of other risks.

Above all, the taxonomy brings increased transparency. The investors tend to ponder in which value chain they want to be involved, meaning they are after the lowest chance of risk. The corporate world is used to the fact that transparency and reliability in accounting are part of corporate liability. One must be able to examine the effects of business operations on the environment in a comparable, long-term and global manner.

There is a shortage of green investment sites – not money

Experts in the financial sector agree that there is enough money in the market, but rather a shortage of green investment sites. Due to the lack of incentives and knowledge, almost thirty trillion euros are still locked up in unsustainable investments worldwide. The taxonomy’s role is to direct money away from unsustainable investments and towards responsible ones.

The objective of the European Investment Bank EIB is that by 2025, 50 percent of the bank’s investments are secured in climate and environmental investments, and this 50 percent will be measured conforming to the taxonomy. In addition, the remaining 50 percent must comply with the Paris Agreement and the 1.5 degree objective. In 2020, the share of such so-called green investment was about a third of the EIB’s investments.

We at Istutapuita.fi offer a service that fits directly into the EU taxonomy. Let’s talk!