Green transition, part 3: The economic impact of taxonomy and emissions targets probably be seen in the longer term

The so-called EU taxonomy does not yet have a clear impact on the availability or pricing of financing based on the earnings reports of large companies listed on Nasdaq Helsinki. We believe that reaching the emissions targets may require investments for certain industries already in the medium term. On the other hand, we do not expect most companies to demonstrate significant costs or investment needs related to this in the short term. 

We added an ESG section to the company reports of the largest companies on Nasdaq Helsinki. In the section we examine the development of the taxonomy percentage and the effect on financing. In addition, the examination includes emissions targets and potential investment needs they generate.

The purpose of the ESG section is to primarily assess these three issues:

1) The impact of taxonomy on the availability and pricing of financing

2) Emissions targets and related investment needs or costs

3) Synergies between business development, increasing the taxonomy percentage and achieving emissions targets.

Taxonomy revision and preliminary results

Taxonomy is EU legislation aimed at steering funding to sustainable industries and activities. This is believed to contribute to the green transition. In practice, the EU has produced a list of industries covered by taxonomy (taxonomy-eligible activities and products). If a product within an industry meets very precisely defined environmental criteria and the product’s production process considers certain human rights and good governance practices, the product is taxonomy-aligned. Very roughly speaking, companies must report their share of revenue, capital expenditure and operating costs that consist of taxonomy-eligible and taxonomy-aligned activities. The financial sector, in turn, must in certain circumstances report the share of taxonomy exposure of the- products they offer.  Legislation is constantly evolving, as are reporting practices. The aim of increased reporting is to turn attention to the green transition and to increase the financing opportunities for activities that support it.

Based on the examination, we found that large Finnish companies do not yet benefit significantly from more favorable financing conditions or easier access to financing that taxonomy could bring. We do not see, however, that low taxonomy percentages for otherwise stable large companies would significantly hamper the availability of financing in the near future.

Twofold taxonomy tone on Nasdaq Helsinki

We assume that taxonomy-eligible products and activities are slightly less sensitive to political risks. This is particularly emphasized in energy-intensive sectors such as energy, fuel or metal production. Fortum, Neste and Outokumpu report the highest taxonomy percentages on Nasdaq, which we believe reflects the investment of these companies in sustainable products/activities in their own industry. 

On the other hand, we do not see that a low taxonomy percentage automatically means a high risk, e.g., in terms of environmental legislation development. In a few cases we believe that the low percentage was primarily caused by the narrow sectoral coverage of taxonomy legislation. This is reflected, e.g., in Wärtsilä’s low taxonomy percentage.

Taxonomy legislation, and naturally also the possibilities linked to it, are in a development phase. For investors, monitoring changes in the figures is probably more relevant than the current figures themselves. 

For emissions targets, Scope 3 targets are most challenging, although investment needs are likely to arise from other emissions targets as well.

Large companies are ambitious in terms of their climate targets. We do not, however, expect achievement of these targets to cause significant unexpected costs or investment needs in the near future. A significant number of large companies have committed themselves to the Paris climate objective and set the necessary targets extensively through the value chain.

We estimate that most companies face challenges in their efforts to achieve emission reductions in so-called Scope 3 emissions (value chain emissions, e.g. subcontracting chain activities or products). In all industries, these targets are also largely dependent on the green transition of other sectors. The influence of companies without significant changes in operating models or costs is limited. Additional information is needed on how the targets are to be achieved.

We do not expect Scope 1 and 2 (own energy production, purchased electricity and heat) emissions reductions to entail significant short-term costs for most operators. We do, however, anticipate that investment needs may arise already in the medium term, e.g., in own energy production of energy intensive companies.

In the longer term, we estimate that certain industries may see a link between taxonomy-aligned capital expenditure and achieving climate targets. Investments in researching low-emission activities, low-emission cars or buildings contribute to emissions reductions.  However, we do not believe that a low taxonomy percentage necessarily means that climate targets cannot be achieved. This is because the legislation is still in progress. The taxonomy legislation should expand by next year, so we are waiting for the figures to be updated.

Table Taxonomy figures and emissions targets of the largest companies on Nasdaq Helsinki, companies’ annual reports used as source.

More aritcles by the same author:

Green Transition, part I: US Inflation Reduction Act - Just another headache or a gold mine?
Green transition, part 2: emissions trading reform still veiled in mystery

The author of this article, Karoliina Loikkanen, is head of ESG solutions at Inderes. She has an extensive background on ESG issues and is passionated to develop the dialogue between investors and companies on ESG further.