Experts on the EU taxonomy
Johanna Lundgren Gestlöf,
Sustainability Manager, SPP

In the second part of this interview series we are happy to share the thoughts and insights from Johanna Lundgren Gestlöf, Sustainability manager at SPP.

The EU taxonomy has undeniably made headlines and raised issues within both sustainability and finance. Although the vast majority agrees that the taxonomy is a relevant step forward, there is yet much left to be defined and still much to learn from its practical application.

To raise our knowledge about the EU taxonomy, we have interviewed experts with different perspectives who have already gained a clear picture of what the taxonomy means in practice. In the second part of this interview series we are happy to share the thoughts and insights from Johanna Lundgren Gestlöf, Sustainability manager at SPP:

Tell us briefly about your background!

After my Master’s degree in Economics (Stockholm School of Economics), I spent several years as a Management Consultant at Qvartz (now part of Bain). For the past 1.5 years, I have been working as Head of Sustainability at SPP. In addition to my professional background, I have also gained political experience from both national and local levels.

How did you first come into contact with the EU taxonomy?

When I started at SPP, the taxonomy was brought up at a very early stage. At the time, it was still not discussed at a detailed level, but the framework and its purpose were well established and we knew that it would be both comprehensive, transformative and debated.

The debate intensified significantly last autumn when the European Commission published proposed thresholds for sustainability classification. Since several of Sweden’s most important industries within the green transition fell outside the sustainability classification, the taxonomy was placed high up on the sustainability agenda. In the EU Commissions’s final proposal, the classification thresholds had been somewhat adjusted, but many Swedish industries are still unsatisfied.

At SPP, we want to be able apply the taxonomy as a tool to track and verify that investments move in a more sustainable direction. It is hence important that the taxonomy adds value in our analyzes and that we use a common language throughout the financial industry. The taxonomy has the potential of increasing comparability across investments whilst reducing the risk of “greenwashing”.

In my role as Head of Sustainability, it is important to me that the framework is correctly interpreted and applied. It will work as an analysis tool for many. As a financial market player, we will not report on the taxonomy in its entirety until the year 2024, even though some parts will begin to apply as early as next year (2022). Up until now, our focus has mostly been on understanding the meaning of the taxonomy and what implications it has, trying to assure that we can plug in as much data as possible at an early stage, even though much of it is currently based on estimates.

What are your impressions so far?

My opinion of the taxonomy is two-fold: on the one hand, it is an extremely important framework for avoiding “greenwashing”, expanding the availability of sustainability data used in investments, raising awareness of sustainable investments and ensuring data comparability across businesses in the EU. On the other hand, the taxonomy does not have legal status and will hence not hold a monopoly on defining what is sustainable or not. It must be regarded as one tool among others within sustainable finance regulation.

In my opinion, the taxonomy debate has become quite distorted. There is a sentiment that industries or investments that do not meet its sustainability classification threshold values will be labelled as unsustainable. However, activities that do not meet the threshold values exist in a wide spectrum: from almost meeting the threshold yet falling outside, to doing great damage to the environment, to not even being relevant from an environmental perspective at all.

The climate-related goals in the taxonomy are scientifically in line with the Paris Agreement and a temperature increase of a maximum of 1.5 degrees. At present, we are on route to a temperature increase of at least 3 degrees, which means that a minority of current business activities will be classified as sustainable according the taxonomy. Yet, most industries include companies that do take positive action in comparison to their competitors. The EU taxonomy will support investors in understanding on what parameters some companies are more sustainable than others in the same industry or across industries. 

Models on how to divide investments into those that have a positive and negative sustainability impact are currently in development. The advantage of the taxonomy is that these models will not only be specific to each financial player, but established within the entire EU. One example is electricity generation: in order to be classified as “green”, you must emit a maximum of 100g CO₂/kWh. If you emit more than 270g CO₂/kWh, the taxonomy classifies your actions as seriously damaging the climate. By setting the classification emission values so far apart, the taxonomy fails to capture all values that fall in between. There will be players who emit 110g, and those who emit 230g –  yet they fall within the same range. Naturally, we will continuously reduce CO₂ emissions in our portfolios regardless of the current taxonomy parameters and look for investments that help us reaching our goals.

What effects do you expect the taxonomy to have for listed companies?

Requirements on demonstrating and reporting on activities and investments in relation to environmental sustainability targets are constantly increasing. I believe that listed companies are inherent forced to be transparent on their activities, which will force them to becoming even more sustainable. Listed companies that can demonstrate a large share of taxonomy compatible activities will be attractive investments. But a high taxonomy score will not be enough to be regarded as an attractive investment – investors will still focus on financial risk and return, and will abstain from investing in something that runs the risk becoming a bursting bubble. Furthermore, I believe that investors will have access to cheaper capital over time, e.g. lower borrowing costs.

I do not see that the EU taxonomy will create a significantly different playing field for listed companies that do not have a high proportion of taxonomy compatible activities – with one exception that it will be easier for them to borrow money pin-pointed towards activities that make them taxonomy compatible. If you have a business that seriously damages the environment and climate you will have more expensive capital costs over time, but I think that would have happened even without the taxonomy. Or rather, this is already starting to happen.

And for others?

Those who have businesses that rate well according the taxonomy can use the framework to prove to investors that they are sustainable. As a result, they will probably obtain better financing. To some extent, the taxonomy has the potential to strengthen their competitive advantage as suppliers since larger companies higher up in the value chain need to report on the taxonomy and will hence request information from their suppliers. We will find out what information larger listed companies and banks will request in the future. At the moment small or unlisted companies are not required to report and their activities do not seem to be included in finance companies’ taxonomy figures, at least from the outset. Regardless, I believe that the taxonomy can open up new business opportunities, and it will be beneficial for everyone to understand what is required according to the taxonomy.

What advice would you give to unlisted and listed companies regarding taxonomy and sustainability work?

Regardless of the taxonomy, set a clear goal to stop emitting more carbon dioxide than you can pick up, and demonstrate as soon as possible that your goal is translated into actions and results. And no matter what – ensure that sustainability is an integral part of the business, where you take into account people and the environment, and do not perform any actions that seriously harmful. The taxonomy will be a means for quality checking financial activities from a sustainability perspective, but it will not be enough. The overriding goal is that we succeed in the green transition. From that standpoint it is wise for listed companies to start mapping and benchmarking your activities against the taxonomy as soon as possible.

Starting to report against the EU taxonomy will delight investors and facilitate a smoother transition. As an unlisted company, it is beneficial to understand which parts of the taxonomy may be relevant to your business. But above all it is important that we adjust to meet the climate goals, and the taxonomy is just a tool to secure the financing of that transition.

The taxonomy has been faced with some opposition. What are your thoughts on that?

It is important to remember that the taxonomy is not a law regulating what one may or may not do. Its purpose is to improve the transparency of sustainability data so that we can make more informed decisions as investors. We and our customers must be able to compare sustainability data and information between different players to ensure that capital is steered in the most sustainable direction.

Media often paints the image of the taxonomy as a legal framework, instilling a sense that performing activities not listed as green can lead to financing problems. But as mentioned above, that is neither the purpose of the taxonomy nor the manner in which it will be applied. 1-5% of the market is currently expected to be taxonomy compatible: it would not be viable if 99% of all companies were to suddenly receive more expensive or restricted financing. I think that players on the financial market – especially banks – should be more clear on how they will secure financing for different types of sustainable investments in the future. The taxonomy will primarily be used as an analysis tool to define which companies to invest in.

The taxonomy is still new – what do you think is the next step?

First of all, we will see if the European Parliament votes in favor of the proposal for threshold values ​​for climate related goals this autumn. I think it will take a couple of years until we have reliable data and can see what impact the taxonomy has on capital flows. When the non-financial reporting directive evolves into the corporate sustainability reporting directive, more companies will report on taxonomy compatibility in their operations. It will be interesting to see if countries and regions outside the EU move in the same direction.

The EU expert group, Sustainable Finance Platform published two reports in July 2021, proposing 1) a taxonomy encompassing actions that cause serious damage to the environment and climate, or actions that have no significant impact on the environment and climate at all and 2) a social taxonomy. They will submit their final report this autumn, along with recommendations to the European Commission. We will see if and what proposals the Commission choose to present.

Above all, it would be useful to have a more clear definition on what causes serious damage, and to clarify that funding is needed for transitioning harmful activities to non-harmful activities. In addition, since sustainability per definition covers more than the environment it would be useful to start discussing a social taxonomy. Moreover, threshold values ​​for other environmental aspects outside climate change e.g. biodiversity and circularity, are to be decided. We will see if these threshold values become equally debated.

 

Many thanks Johanna for your participation!

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