Nordea expert on the EU Taxonomy: It’s a work in progress

Many companies are grappling with the challenge of reporting under the EU Taxonomy, the EU’s ambitious framework for classifying green investments. As a first step in the implementation, companies covered by the Non-Financial Reporting Directive are required to report on their eligibility under the Taxonomy starting in 2022.

Someone with an unique perspective on the task is Matilda Persson, Nordea’s EU Taxonomy expert. With 15 years of experience in sustainable finance, she in 2019 served as a member of the EU Technical Expert Group, which developed the Taxonomy for the European Commission. She later went on to work as a consultant, helping large companies implement the Taxonomy. And now, she’s gaining yet another vantage point from within a bank.

You’ve worked with the EU Taxonomy in numerous capacities. How are you working with it in your current role?

I work with Nordea’s reporting on the Taxonomy. We aggregate the taxonomy eligibility and the alignment of our exposures. This determines our so-called “green asset ratio” – the greenness of our exposures according to the Taxonomy.

This is the first year companies covered by the Non-Financial Reporting Directive are required to report on their eligibility under the Taxonomy when it comes to the first two EU environmental objectives: climate change mitigation and adaptation. How are they finding the task in your experience?

It’s been an interesting period for companies, with the first disclosures coming out now. They’ve encountered many challenges, both in understanding the reporting requirements, what activities are included, and how to relate their own activities to those listed in the Taxonomy. Many companies have been surprised to find that their activities are not yet included. There have also been some surprises around the definition of activities and how narrow that definition is in some cases.

Do you have any good examples?

In manufacturing, for example, if the description only refers to manufacturing of final products, intermediary activities in the value chain are not automatically eligible. Take low-carbon vehicles. A lot of companies in the value chain that provide key components enabling such vehicles to be low carbon are not included, while the end producers are. So companies are still finding their way. It’s also important to remember that the Taxonomy should be seen as a living document and work in progress. We’ll see more activities added, both under climate change mitigation and adaptation as well as the four remaining environmental objectives. Next year, non-financial companies will start reporting on their Taxonomy alignment, where they will have also have to interpret the criteria and how they relate to their business. So we’re likely to see another round of these discussions.

Early studies of companies’ Taxonomy reporting have found low reported eligibility. For example, our recent analysis found average eligibility among companies to be just under 30%. What do you make of these low eligibility numbers?

That’s one of the hot topics in the market right now. There’s a lot of discussion around what it actually means for a company to have low eligibility under the Taxonomy. How will this affect investors’ view of the company and its access to capital? So far, there’s an understanding that the scope of activities in the Climate Delegated Act is in some sectors still quite narrow, which explains the low eligibility numbers. I don’t think there’s too much reason for concern on that. This is a work in progress, and more activities will be added. For companies, there’s a need for transparency, to clearly communicate why your eligibility number is low. For example, where they contribute to environmental objectives but are not yet in the Taxonomy. It will take a couple of years before eligibility really matters. And by then, the most important ratio to look at will probably be the company’s alignment compared to its eligibility. That will have a bigger effect on whether the company is considered sustainable.

The EU Platform on Sustainable Finance recently released its long-awaited report on the remaining four environmental objectives – water protection, circular economy, pollution prevention and biodiversity. What are the next steps?

The delegated act for the other environmental objectives is not expected before the beginning of 2023. The Platform has now published the report with their final recommendations to the EU Commission on those four objectives regarding the activities and criteria. There will be a draft delegated act for public consultation, and I encourage everyone to have a look at it and give feedback. After the Commission takes comments and adopts the delegated act, it will go to co-legislators for evaluation. More activities will be added under these objectives, so the current Taxonomy is today quite narrow compared to what it will be. Everyone is eager to see the activities under these four objectives.

The EU Platform also recently released its report on the proposed Social Taxonomy – a labelling system for activities that advance social welfare. What can we expect when it comes to a Social Taxonomy?

The Commission will now take these recommendations in and later publish their own report for how to structure a Social Taxonomy. We don’t expect a Social Taxonomy to  come in the near future and there are some fundamental questions still outstanding. For example, how will it connect to the environmental Taxonomy? As it is today, social sustainability is addressed in the environmental Taxonomy with minimum social safeguards. Would we have the same setup in the Social Taxonomy with minimum environmental safeguards, or will it address environmental issues through “do no significant harm” criteria? That’s quite a big issue to be tackled before further development.

Do you see the exercise of reporting under the Taxonomy starting to shape company strategy?

It’s too early to say. For banks and companies in general, the focus has been to tackle the actual disclosures and get the numbers in place. From that, you get some interesting discussions when different parts of the organisation are put in the same room. There have been some interesting strategic discussions in companies, but I haven’t seen the Taxonomy significantly changing a business yet. However, I have seen some interesting trends. For example, I have seen an increasing interest to implement the TCFD recommendations (the Task Force on Climate-Related Financial Disclosures) as companies start to screen for physical climate risks under the “do no significant harm” criteria for climate adaptation. But the Taxonomy is a complex framework that regulators are working with and participants in the real economy and financial markets are trying to understand. There will be a lot of interpretation questions at the start, and there’s still room for those questions in the market.