The EU Taxonomy has been widely discussed by the policy makers and the financial sector during the last year. However, most businesses still haven’t realized that they might be affected by it, not only on spare separate occasions but in daily business operations. 

Nevertheless, whether they know the effects or not, they would need to comply with the regulation. Almost all businesses planning their development will eventually come up with investment projects that include at least one of the EU Taxonomy regulated sectors. Those might be investments in technology, real estate, vehicles, energy supply, etc. Most of these will require external financing – and here, the EU Taxonomy will play a significant role. Besides “conventional” credit rating assessment, the banks will need to assess if the intended project is sustainable and if they want to associate with it and finance the deal. 

Just a couple of years ago, it was not clear what a sustainable investment meant – there was no definition for that. Today, the EU Taxonomy Regulation and its delegated acts define precisely and in a very detailed manner what kind of projects and assets are “green”. Currently, it covers sectors such as energy, real estate, transport, specific manufacturing activities (not all yet, but it should be only a matter of time), water and waste management, ICT and others. 

What does it mean for you as a company which might want to invest in some of those areas? There are three steps you might want to do to be better prepared: 

1. Get to know what kind of the EU Taxonomy requirements might apply to your company, considering its business. Note that you should not only look at your primary industry but also the assets you own and would like to develop. For example, as an energy production company, you might also own property and an extensive vehicle fleet; therefore, the requirements from all three sectors – energy, real estate and transport – might apply to you; 
   
2. Review your investment portfolio against those requirements and identify if any changes are necessary to make it more Taxonomy-aligned; 
3. Re-asses and, if necessary, change your internal processes for investment project development, approval and implementation to ensure timely that the EU Taxonomy requirements are identified at an early stage and the projects are developed accordingly. 

For some companies, the fourth step would be necessary as the large and listed companies will also be subjected to specific reporting requirements on EU Taxonomy alignment. This topic should be discussed in a separate blog post.  

Of course, everything noted above does not mean that you cannot invest in anything that is not mentioned in the Taxonomy or is not acknowledged “green” by it, but it would be much more complicated for you to defend such an investment and obtain financing for it. In the end, the reasoning behind this regulation is to turn investment flows in a more sustainable direction altogether. 

KPMG has provided training and support to the companies across the Nordics and Baltics concerning all of the steps noted above. We will also be happy to help you in your first steps in the EU Taxonomy! 

Ieva Kustova, Head of ESG & Sustainability, KPMG in Latvia