Navigating the EU Taxonomy for Sustainable Finance for SMEs
The EU Taxonomy Regulation is an important part of the EU Green Deal, separating sustainable investments from the others. As a small and medium sized business (SME), what does this practically mean for you?
Who does the EU Taxonomy apply to?
The EU Taxonomy Regulation applies to anyone claiming that their investments are “sustainable.” There are different reasons why different businesses may do this:
Companies: showing that their capital expenditures (capex) are sustainable. These include large fixed costs, such as manufacturing equipment, that your business needs. A company may elect to do this to show investors that they’re sustainable, to improve ESG ratings of a large publicly traded company, or to prove progress against targets.
Large & listed companies: are required to report on the proportion of their capex that is aligned with the EU Taxonomy.
Banks: banks and other financial institutions may set targets for sustainable financing, for example, that 80% of investments are sustainable or “aligned with the EU Taxonomy”. These targets are then reflected in the bank’s requirements for borrowers, for example, that they demonstrate alignment with the technical requirements or fall within certain sectors.
Investors: like banks, investors may work towards targets for sustainable finance that make them more attractive for funding. These sustainability targets may steer investors and their funding towards “taxonomy aligned activities” in certain sectors over others. For companies with funding from investors, they may find additional requirements to demonstrate that they are meet the technical requirements.
How does the EU Taxonomy impact SMEs?
For SMEs, investors or lenders may require that you show that your business is aligned with the EU Taxonomy. In some cases, this may be an administrative exercise in reporting. In others, demonstrating alignment with the EU Taxonomy may be a critical requirement for securing funding. Given increasing investor interest in sustainable investments, aligning your business with the EU Taxonomy is a no-regret move to secure your access to funding.
What do SMEs need to do?
Fundamentally, aligned business activities should substantially contribute to one or more key sustainability objectives:
Climate change mitigation
Climate change adaptation
Water
Circular Economy
Pollution Prevention
Biodiversity
Demonstrating that your business activities are aligned with the EU Taxonomy is a multi-step process:
Are your activities explicitly covered by the EU Taxonomy? While some activities such as installing solar panels are explicitly mentioned in the EU Taxonomy, others, such as manufacturing equipment for oil drilling are not. If your business activities are listed in the EU Taxonomy regulation, those activities are eligible.
Do you meet the technical requirements? In several delegated acts, the European Commission specifies a series of technical requirements to prove that specific activities do indeed contribute to sustainability objectives, without harming others. These technical requirements vary widely depending on the activity or technology.
The European Commission has helpful resources to explore their requirements and which types of activities can be aligned with the EU Taxonomy Compass.
Ready to take the next step?
Aligning your business activities with the EU Taxonomy is important to future-proof your business and secure access to the funding you need to grow. Find out which sustainability opportunities best fit your business and EU Taxonomy with our Quick Sustainability Assessment, and start your journey today.
