EU taxonomy: vice or virtue?

Arjan Ruijs, senior responsible investment officer chez Actiam. (Photo: Actiam)

Arjan Ruijs, senior responsible investment officer chez Actiam. (Photo: Actiam)

The EU taxonomy helps financial market participants, asset owners and investment advisors to integrate ESG considerations into their internal processes and inform their clients accordingly.

To know whether a company is EU taxonomy-eligible, investors have to ascertain that the economic activity:

- contributes substantially to at least one of the European environmental objectives;

- does no significant harm to any of the other objectives;

- complies with minimum social safeguards;

- and complies with the technical screening criteria.

The “do no significant harm” (DNSH) principle is an important addition to the taxonomy. Minimum requirements and performance standards will be formulated to avoid that progress against one objective is made at the expense of others.

How will the EU taxonomy help?

Actiam sees the taxonomy as a major positive step towards realising a sustainable future as it provides clarity. It enables new entrants to know whether their investments are indeed sustainable, enables data providers to align their data systems to the technical screening criteria and enables companies to disclose the information required.

It also broadens the sustainable investments scope. Many investors currently focus on climate and on reducing the carbon intensity of their portfolios. Notwithstanding the importance of the transition towards a low-carbon economy, the other European environmental objectives, such as those on biodiversity, water, circularity and waste prevention, are equally important for solving the challenges society currently faces.

The new taxonomy pushes the bottom of the sustainable investment market upwards. However, does it also create new incentives for those already operating sustainably to do even better? The taxonomy would help the market for sustainable investments more if it would better distinguish between different shades of green. During the negotiations that led to the regulation, the plan to also define “non-sustainable” investments (naming and shaming) was not adopted. So the taxonomy allows for calculating the percentage of a company’s revenues that is taxonomy-eligible. Yet, it does not correct this for the possible negative impacts of the company’s other activities on the EU environmental objectives. The DNSH principle only applies on the level of an activity and not on the level of a company.

Does the taxonomy sufficiently underscore that investing in sustainable companies not only contributes to a sustainable society, but is necessary for investors to maintain revenues in the long term?
Arjan Ruijs

Arjan Ruijs,  senior responsible investment officer,  Actiam

Not all funds adopt this principle for other objectives. Some impact strategies focus on a limited number of SDGs or on the magnitude of “green revenues”, not considering possible trade-offs or negative green revenues by other activities of the same company. The taxonomy would help investors if it would focus DNSH on the level of a company instead of an economic activity.

The key question is whether investors will indeed place sustainability at the heart of their financial decision-making process. Does the taxonomy sufficiently underscore that investing in sustainable companies not only contributes to a sustainable society, but is necessary for investors to maintain revenues in the long term? Climate change, water scarcity, pollution, declining biodiversity, as well as social unrest as a result of breaches of human or labour rights pose actual, existential risks. These are not only societal risks, but also in the medium to long term to businesses, and therefore to investors.

Actiam’s sustainability policy measures whether companies have sufficient adaptive capacity to tackle the risks the sustainability transitions bring about. It follows the taxonomy by measuring the impact of companies’ behaviour to sustainability, but also goes one step further. Companies are categorized as sustainable only if they have the adaptive capacity to adopt the innovations needed, for example, for a transition to a low-carbon society.

It would help the market if the taxonomy would also adopt a more forward-looking argumentation and consider as well the materiality of making these transitions.