EU taxonomy can strengthen SMEs in green transition – EURACTIV.com
Small and medium-sized enterprises will remain exempt from the new disclosure rules on the EU’s sustainable finance taxonomy from 2022. However, business leaders would be well advised to follow its implications, including SMEs, writes Finn. Wendland.
Finn Wendland is an economist specializing in climate and energy policy at the German Economic Institute.
EU taxonomy increases sustainability disclosure requirements for large public interest companies from January 2022, but small and medium-sized enterprises (SMEs) will be spared the new rules until 2026.
Despite the formal exemption, it is likely that large investors and end producers will pass on their reporting obligations to intermediate producers anyway – many of whom are SMEs – in an effort to ensure taxonomic alignment.
In this context, recent initiatives by major manufacturers, such as Porsche or Siemens, to set their own carbon neutrality targets for their supply chains can be seen as prominent examples of a much broader trend towards more transparency. in traditional industrial sectors.
EU taxonomy and related regulations contribute to the increasing top-down pressure on intermediate producers and SMEs to prepare standardized information on sustainability. As only one in three companies in Germany has implemented a sustainability strategy, according to a survey by Commerzbank (2021), it seems reasonable to suspect that few companies are really prepared.
With the entry into force of the EU taxonomy, the ability to report according to technical selection criteria – and, ideally, to prove a high share of taxonomy alignment – will likely be rewarded with one point. from a regulatory and commercial point of view. Rather than wait passively, SMEs should seize the current situation as a prime opportunity to prepare for looming reporting requirements on EU taxonomy and to build competitive advantages ahead of green transformation.
Preparing in advance for information can strengthen the positioning of SMEs to improve business resilience, financing conditions and sales prospects.
To recap, the EU adopted the EU taxonomy in 2020 as the main instrument to promote transparency on the sustainability performance of economic activities in Europe and beyond.
By introducing quantitative reporting requirements for listed companies with more than 500 employees from January 2022, the EU taxonomy sets a binding precedent among many eco-labels and voluntary standards.
The European Commission plans to extend the EU taxonomy to six environmental objectives and rules for around 50,000 companies by 2026. Relevant disclosure information includes revenue shares, capital expenditure (CapEx) and operational expenses (OpEx) which can rightly be linked to Activities.
Given the ambitious thresholds to be reached as part of the selection criteria, EU taxonomy is seen by some as the new gold standard for certifying the greenness of business models and investments.
Although the new mandatory disclosure rules are initially limited to large market players, there is reason to believe that SMEs may feel the consequences on a larger scale and sooner than expected. The apparent lack of preparation and discussion of possible taxonomic implications among SMEs in intermediate production sectors seems particularly surprising given the different financial and economic dependencies with large stakeholders.
In particular, the growing importance of financial transparency for investors and new regulatory incentives for end producers point to two potential lines of conflict.
First, as sustainability has become a major concern for politicians and consumers, many investors have increased their commitments to finance sustainable projects. In 2019, the European Investment Bank, the EU’s central bank for infrastructure and development, announced that it would increase its share of sustainable development investments to at least 50% by 2025.
Mainly, the new interest in green finance among creditors coincides well with the growing demand from companies to fuel their investment needs in carbon neutral technologies and innovation. The European Commission plans to integrate the EU taxonomy into the core of financial instruments, credit ratings and banking rules with the aim of easing the conditions for sustainable finance.
As the EU taxonomy appears destined to become the key selection tool for sustainable finance in the EU, it can also prove critical for the potential blacklisting of investments without a minimum degree of compliance. . In this context, preparing sustainability documentation in line with EU taxonomy from the start can help SMEs avoid excessive financing costs and gain investor confidence.
Second, since the first set of EU taxonomy selection criteria focuses on activities in energy-intensive intermediate sectors, such as power generation and manufacturing, its implications are likely to affect chains supply and supplier-producer relationships to a wider range.
Under Article 8 of the EU taxonomy, companies can credit portions of their turnover and operating expenses derived from inputs aligned with the taxonomy for their environmental performance, leaving producers final inherent interest in ensuring full alignment of the taxonomy of their supply chains.
As the degree of taxonomic alignment becomes a criterion for selecting suppliers in the future, SMEs in intermediate sectors that can prove their taxonomic compliance place themselves in a potentially advantageous position vis-Ã -vis their competitors.
Recent initiatives by Daimler and Volvo to engage in long-term partnerships with potential green steel producers (H2GS and SSAB) suggest a strong interest from manufacturers in traditional industries to tackle major sources of emissions and restructure their supply chains in response to environmental challenges.
In summary, while many companies remain exempt from the new EU taxonomy disclosure rules from 2022, business leaders and executives are well advised to follow its implications as industry leaders and market structures are reorganizing to meet long-term environmental goals.
In addition, SMEs can carve out competitive advantages to strengthen business resilience, improve financing conditions and promote sales prospects by dealing with EU taxonomy and preparing for information early on.
[Edited by Alice Taylor]