Here’s how the EU Taxonomy could influence US businesses

by Louie Reckford

The EU Taxonomy offers a blueprint for companies to clarify which investments are environmentally sustainable – and whether their activities can be classified as being sustainable. In turn, this helps investors ensure their investments are indeed sustainable and do not contribute to greenwashing.

A new research partnership between New York University's Center for Global Affairs and Ramboll recently evaluated the extent to which large US financial institutions and real estate firms are prepared to comply with these ambitious sustainable reporting requirements.

The main takeaway from our research is that these firms need more and better data to assess whether their assets meet the definition of sustainability, as outlined by the EU Taxonomy.

The results offer opportunities for these firms to boost sustainability plans so they can thrive in the rapidly evolving European market.

The partnership evaluated three large financial institutions and two large real estate firms, all of which are based in the US.

All five of the companies evaluated for this project use the Task Force on Climate-related Financial Disclosures’ (TCFD) voluntary framework, which indicates a baseline level of understanding of climate-related risks and opportunities.

A growing number of companies in the US and globally use the TCFD voluntary reporting framework to disclose their climate-related risks and carbon emission reduction commitments. As such, the concept of evaluating sustainability actions is not new to US companies, but the degree of disclosure demanded is different.

Voluntary disclosure under the TCFD does not contain the level of detail the EU Taxonomy requires, nor does it go beyond climate-related disclosures. In contrast, to align with the Taxonomy, businesses must also meet minimum social safeguards under the OECD Guidelines on Multinational Enterprises and UN Guiding Principles on Business and Human Rights. That could make complying with the EU Taxonomy more difficult for US-based companies.

Our research shows each of the five firms evaluated believes climate change poses a serious threat, and all express a desire to contribute to the energy transition. While some firms have gone to great lengths to report on their sustainability efforts, they are not necessarily prepared to comply or align with the EU Taxonomy regulations.

This divergence between statements and action presents an opportunity for other businesses to help these companies prepare for EU Taxonomy compliance. Particularly, there is a need for a standardised method in compiling and reporting data. As it stands, investors are forced to rely on small and medium enterprises (SMEs) to report on their sustainability metrics and calculate their own green asset ratio, a key performance indicator under the EU taxonomy.

As SMEs are not required by the EU Taxonomy to report, it is unclear whether large American asset managers will pressure SMEs to provide the information necessary, or simply choose not to attempt to meet the requirements to be considered an Article 8 or Article 9 fund (known as “light green” and “dark green” funds, respectively) under the EU Taxonomy.

Another relevant finding of the data is the difference between the companies’ US-based and European-based operations. The companies with greater exposure to the European market have done a greater amount of sustainability work, particularly in the real estate sector.

Real estate firms are more aware of how new regulations impact buildings and are increasingly responsive to tenant and occupier demands for green buildings. On the other hand, financial institutions appear less prepared to meet the demands of the shifting regulatory regimes and seem less pressed to meet the EU Taxonomy requirements.

Companies will find it worth watching whether financial markets create pressure for non-European financial institutions to align with the EU Taxonomy as it matures.

The partnership combines the expertise of Ramboll, and of NYU CGA students studying energy geopolitics and the energy transition. The partnership expects to yield insights for companies hoping to adapt to the increasingly changing environmental, social, and corporate governance (ESG) landscape due to new EU green taxonomy regulations.

The EU Taxonomy, which took effect 1 January 2022, sets rules and guidelines for how businesses must report on their climate and environmental impact. It is expected to have a far-reaching impact on how businesses invest and help unlock financing for businesses that can prove a clear sustainability impact. Louie Reckford is a M.S. candidate in Global Affairs at NYU specialising in Energy and Environmental Policy. He previously worked as a Policy Advisor at Foreign Policy for America and as a staffer for United States Senator Jeff Merkley.

To contact the editor of this article, email: Devapriyo Das, Group Content Manager, Ramboll