The green taxonomy confirms the commitment to a sustainable economy

In its technical and incomprehensible to the general public aspect, the green taxonomy reflects important issues for companies. It consists of a classification of economic activities according to the CO2 emission thresholds generated by their activities. This need for classification can be understood in the light of the recently announced targets for limiting global warming. Countries participating in COP26 in November 2021 have indeed committed to reducing their GHG emissions by 45% by 2030 (compared to 2010). As for the European Union, it intends to achieve carbon neutrality by 2050.

The task of green taxonomy

The green taxonomy is hotly debated, as setting a threshold below which a company is no longer green can have very specific implications for the financing of its activities and its entitlement to certain state aid. At the macroeconomic level, this can lead to distortions of competition between countries, depending on the level of thresholds and requirements that weigh on the economic fabric. In Europe, taking advantage of green activities, let’s say contribute to at least one of the six green funding goals without undermining the other five.

Are the goals:

  • Climate change mitigation.
  • Adapt to climate change.
  • Sustainable use and protection of water and marine resources.
  • Make the transition to a circular economy.
  • Pollution prevention and reduction.
  • Protect and restore biodiversity.

Regulatory standards that remain incomplete

To date, only the first 2 objectives operate in a limited number of sectors, the exact timing of the next four remains to be determined. However, there is an urgent need for companies and financial institutions to be able to rely on established and usable standards. The first is the availability of the tools needed to comply with the Corporate Sustainability Reporting Directive (CSRD), which strengthens non-financial reporting requirements. For the latter, the challenge is to be able to measure the share of funding allocated to sustainable economic activity, which is formalized in an efficiency indicator called the Green Asset Ratio (GAR), which reflects the share of fixed assets in all assets. GAR publication is mandatory under the Non-Financial Information Directive (NFRD – Non-Financial Reporting Directive).

Complex assessment of companies’ impact on the environment

Compliance with these commitments is now a difficult exercise. Banks face a lack of relevant information. However, CSRD should allow them to find In December 2022, data are directly with the companies they finance, as the latter will have to publish their harmonization with the European taxonomy through simplified reporting with uniform standards to be developed by the European Financial Reporting Advisory Group (EFRAG). But it is safe to say that full compliance with this regulatory obligation will take several years, and it will have to be accompanied by inspections to ensure the quality and accuracy of the data provided. Moreover, companies with less than 250 employees, and especially contractors outside the European Union, will not be affected by these commitments.

Thus, financial institutions should establish estimates based on the nature of the activity and the use of the allocated funds. This is a real problem because companies often develop different activities, some of which correspond to environmental taxonomies and some of which do not. If you do not issue green bonds, the use of which is indicated, it is difficult to accurately estimate the distribution of funding provided. Finally, bank information systems are poorly adapted to the calculation of GAR due to the subtleties of the European taxonomy. That is why credit institutions and European companies need a real revolution and significant investment to respond to this new situation. The price to pay for creating a low-carbon economy and achieving the European Union’s ambitious goals.