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| 2 minutes read

Understanding the EU green Taxonomy

I recently interviewed  Alexander Stevens, CEO of Greenomy, an award-winning regtech/data SaaS platform that enables companies and financial institutions to generate and access standardized company level ESG data.

I wanted to find out more about the new mandatory financial legislation, the EU green Taxonomy, and what it means for companies implementing green policies and governance.

Here's what I learned...

Non-financial reporting is becoming mandatory and mainstream

Starting from January 2022 all financial institutions, banks and funds on one side, and large listed companies on the other, started having to screen their loan books & investment portfolios to ensure compliance with the EU green Taxonomy.

What’s more, the scope is expanding over time. In 2023, all private companies with 250+ employees will have to comply.

In 2026, it will expand to SMEs. That means millions of companies will have to undertake non-financial reporting in addition to financial reporting. 

And it's not just in Europe. There are already 25 countries adopting their own equivalent sustainable finance legislation, and they are trying to harmonize so that 75% of the legislation is common across the globe.

As Alex said "Sustainable financing will flow from one region to another, and everyone will speak the same language”. 

It's the scale of the task that is most challenging

The big challenge with the legislation is that the taxonomy is thousands of pages, quite technical, and there is not enough human expertise to guide all those organizations.

There is also data collection requirements and the need to have systems in place, to do the reporting according to the legislation. That entails a big compliance cost estimated at 2.1 billion Euros.

Along with commercial pressures to report accurately

It is important to say that before this legislation, there were multiple frameworks to measure sustainability. Depending on who used what, we were ending up with different results. It was not necessarily the company’s fault. Thanks to the green taxonomy, there is less discretion and there will be less ‘greenwashing’.

Despite that, there will probably always be cases of corporates embellishing their results. 

There are countries like Denmark that are giving financial fines in case a company is caught greenwashing.

Recently there was a German American company caught greenwashing and their stock price fell 10-20%.

There is more and more commercial pressure to make sure companies report properly and do not provide incorrect information to the market. Especially if listed, a company needs to be careful to comply to ESG rules in terms of reputation.

But this also creates opportunities

Finance is integrating ESG characteristics, it’s no longer just looking at financial performance.

For companies, the public, the board, and the authorities require that they implement green policies and governance, but it also creates opportunities to reduce costs and lead to operational improvements. 

As Alex said "The more a company is environmentally friendly, the better it is at creating potential for increased operating margin and financial returns".

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I met Alex in 2015 when we were at the European Central Bank, in Frankfurt. He was working in the Legal Directorate and I was working in Macroeconomics Directorate, and we kept in touch over the years. 

Click to learn more about Alex and on Greenomy.

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