Companies report on four new EU Taxonomy objectives: water, pollution, biodiversity and circularity

Until this year, companies have reported on the first two objectives of the EU Taxonomy: climate change mitigation and climate change adaptation. This year, for the first time, they started to report on their eligibility for four new objectives: water, pollution, biodiversity and circularity. 

The Taxonomy is the EU’s official classification system for sustainable economic activities. An activity is considered “sustainable” if it makes a substantial contribution to one of the six environmental objectives and does not significantly harm any of the others. To be aligned with the Taxonomy, an activity first has to be eligible, or listed in the EU Taxonomy. 

While companies will only disclose their alignment with the four new objectives from next year, their eligibility can give us an initial glimpse into the role these objectives could play in increasing companies’ Taxonomy exposure, according to Marco Kisic, Head of ESG Research in Nordea.

“We expect to see a step-up in average alignment next year, as companies start reporting under the four new environmental objectives,” he says. That should expand the universe of investments considered sustainable.

Pharma companies now eligible

When the Nordic companies covered by Nordea’s equity research team are weighted equally, the majority of their Taxonomy eligibility stems from the climate mitigation objective. However the new objectives contribute a relatively substantial ~20% of the total share of eligibility. Circular economy is the objective with the highest eligibility, associated with activities such as manufacturing of recycled plastic packaging, waste management services and the repair and sale of second-hand goods.

When weighting the companies based on market cap, pollution prevention and control (PPC) accounts for the largest share of Taxonomy-eligible revenues. The main activity associated with this objective is the manufacturing of pharmaceutical ingredients and medical products, with certain pharmaceutical companies setting eligibility at 100% of their turnover. 

“This is important as it gives a new set of large caps, which are not renewables, real estate or materials companies, an opportunity to show Taxonomy alignment. This bodes well for companies’ average alignment next year,” Kisic says.

Only few companies report eligibility under the water and biodiversity objectives, and their eligibility levels are low. These objectives are associated with water management, conservation and accommodation activities.

Get an overview of Nordic companies’ latest reporting on their Taxonomy alignment, including which sectors are leading and trailing the pack.