European companies generate only a minor fraction of their revenues from activities in line with the EU taxonomy of sustainable economic activities, according to a sustainable finance survey conducted by Adelphi and ISS ESG.
The German government commissioned the survey before assuming the presidency of the EU Council.
According to the final report on the survey, companies listed on the DAX index generate 27% of revenues from taxonomy-relevant activities as defined in the final report of the Technical Expert Group on Sustainable Finance (TEG), while 1% is estimated to be fully taxonomy-aligned.
The report cited shortfalls in data availability for reporting to explain the low level of alignment in the DAX compared to other indices and also mentioned the prominence of manufacturing and automotive companies in the index.
Over one third of the firms surveyed reported that data was not available either because the taxonomy does not include their activities or the taxonomy was considered ‘not applicable’ to their activities, according to the report.
Many companies were waiting for the final version of the taxonomy before beginning the process of compliance with the taxonomy, it added.
The share of taxonomy-relevant revenues for firms listed on the French stock market index CAC stood at 22%, with 2% from business activities aligning with the EU criteria.
Firms listed on the euro-zone stock index EURO STOXX 50 made 20% of their revenues based on taxonomy-relevant activities and 2% from taxonomy-aligned activities.
A “substantial proportion” of revenues generated in the utility sector comply with taxonomy, the report found, compared to less than 1% of revenues in the automotive sector across the three indices, despite the fact that 69% of the revenue of automotive companies being considered taxonomy-relevant.
The report noted that overall 77% of the companies reached a level of compliance with the EU taxonomy equal to or lower than 1%, while 13% reached a level equal to or above 5%. The number of taxonomy-relevant activities per company varied between zero and 13.
It concluded that the European capital markets offer limited investment options that comply with the EU taxonomy criteria.
Imperfect taxonomy
The survey found that companies reported several challenges with the taxonomy, one of them being the exclusion of many potentially relevant activities. The TEG report only covers two of the six environmental objectives – climate change mitigation and adaptation.
The majority (60%) of companies surveyed reported carrying activities that contributed to these two objectives, but do not generate revenues.
The report also showed that 95% of the companies analysed made climate change investments through capital expenditure (CapEx) or operational expenditure (OpEx).
It also disclosed that the taxonomy does not reflect investment in research & development (R&D), adding that R&D in new technology can move activities towards alignment and reduce carbon emissions quickly.
Surveyed firms also found the TEG report used unclear criteria and vague definitions, leading to interpretation and ultimately creating uncertainty.
As a result, the share of revenues that companies, investors, or rating agencies consider taxonomy-aligned may vary depending on their interpretation, the report said.
Olaf Scholz, German finance minister, said: “Climate change and protecting the environment are the biggest challenges of our time. These issues can only be tackled effectively if we work together. We have to make sure that money flows where it is needed and increase the relevance of sustainability in financial markets.
“Banks, insurers and investors have a particular responsibility in this respect, which is why our message is: invest more in sustainability and carbon neutrality! Transforming the economy towards greater sustainability offers huge opportunities. We need to grasp them now.”
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