October 2023


Assessing corporate alignment to the EU taxonomy

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Investors looking for “green opportunities” in Europe now have access to a tool to help them understand whether a company’s economic activity is environmentally sustainable and aligned with net-zero objectives.

The EU taxonomy, a key element of the European Union's sustainable finance framework, is a classification system adopted in July 2022 to clarify which investments are in line with the European Green Deal. It relies on standard and audited financial data to disclose the percentage of revenues and capital and operating expenditures a company dedicates to meeting EU sustainability targets. Though it seeks to give investors more decision-making power, it does not rate companies, nor tell investors what to invest in.

However, as George Serafeim, professor of business administration at Harvard Business School and State Street Associates academic partner explained, the dataset currently available in the taxonomy is insufficient to adequately assess a company’s taxonomy alignment. 

Using reporting data from Europe’s top 300 companies by revenues, Serafeim performed a first-of-its-kind analysis of the EU taxonomy data. Here are some key findings:

Gap between eligibility and alignment
Serafeim’s research, which looked at the first year of reported data, revealed many firms had higher levels of revenues eligible for sustainable activities than aligned revenues, or revenues that are significantly contributing toward sustainable goals. 

“In some industries, there is a significant gap between eligibility and alignment. So, there is very significant distance to travel to translate eligible activities to aligned activities, particularly in industries involving automobiles and real estate development.” 

Low levels of alignment 
The analysis also indicates low absolute levels of alignment with the EU taxonomy, and significant variability across competitors. The data showed only a small percentage of business activity aligned with the taxonomy’s technical screen criteria. In fact, Serafeim said, some firms received close to a perfect score in key areas, while having close to zero aligned revenues or expenditures. Additionally, companies with higher alignment exhibited no difference in sales growth or profitability margins, and no difference in investor expectations of future growth.

“The assumption that companies that are investing more in sustainable efforts might generate lower margins is not true, nor is the assumption that they might have higher growth,” he said.  

According to Serafeim, the EU taxonomy is a good first step toward transparency and credibility around corporate sustainability disclosures. Previously, the data was self-reported and raised concerns of “greenwashing.” However, many companies complain that the regulations are too complex, and the criteria is burdensome. Still, as companies become better at translating investments into revenues, Serafeim believes investors may begin to see alignment activity increase, and the gap between eligible and aligned begin to shrink.   

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