The characteristics of the technology industry in Finland have not been taken into account in the EU Taxonomy for sustainable finance
Companies within the Finnish technology industry are ranked amongst the most responsible in the world. This contradicts with the EU taxonomy, as many firms are lacking taxonomy eligibility with the current criteria. This means that these firms are not considered sustainable as per the EU taxonomy eligibility. The majority of operators have thus been left to their own devices in assessing the taxonomy eligibility of their business. Taxonomy eligibility reporting entered into force in January 2022, and taxonomy alignment reporting will begin in early 2023.
The environmental classification criteria of the taxonomy, published in summer 2020 along with the Fit for 55 package, oblige financial operators offering investment products to publish information on the consideration of sustainability risks and investment products that are marketed as sustainable and responsible. The aim of the EU sustainable finance classification system, or taxonomy, is to create a set of criteria to determine whether economic activities are seen as environmentally sustainable.
The taxonomy creates reporting obligations for large listed companies employing more than 500 people. In the near future, companies are required to publish the percentage of turnover, capital expenditures and current expenses that are eligible and aligned with the EU taxonomy.
In practice, the introduction of the taxonomy affects the operations of companies in such a way that an increased number of sustainable investment projects are able to obtain financing with more ease and affordability.
Out of 89 companies, 21 companies have taxonomy eligibility
Technology Industries of Finland examined 89 member companies that are listed under the Non-Financial Reporting Directive (NFRD), of which 21 have taxonomy eligibility. The economic activities of the companies in question contribute significantly to at least one environmental goal of the taxonomy. Nine companies did not pass the requirements for taxonomy eligibility, and no mention of taxonomy was found in the annual reports of the remaining companies.
According to the report, Finnish technology companies are showing a high level of readiness when it comes to complying with the criteria of the Commission's regulation. The results of the investigation show, however, that the consideration of the individual characteristics of companies is at a low technical level in the EU taxonomy. Up until now, companies have had to independently assess which part(s) of their business is taxonomy-eligible. This causes uncertainty which, in turn, often compels companies to underestimate the extent to which their business is compatible with the taxonomy criteria due to possible negative consequences of wrongly estimating an activity to be eligible for EU taxonomy.
"Basware's taxonomy-eligible activities cover the so-called Purchase-to-Pay process, which enables Basware's customers to reduce their CO2 emissions and obtain information about their greenhouse gas emissions in their financing processes. Taxonomy-eligible activities represent 82% of Basware's total turnover and include research and development of taxonomy-eligible activities and property improvements, which comprise 95% of total investments. Activities that pass the taxonomy criteria mainly include research and development costs and purchases of taxonomy-related activities. Our share of taxonomy-eligible activities is 75% of operating expenses."
(Annual report 2021, Basware).
In addition, the report found that the unique characteristics of the technology industry have not been considered well enough as part of the criteria of the reference framework. The problem is that the taxonomy does not cover all environmentally friendly activities, at least for the time being, and it endangers the principle of technology neutrality. It is also worth noting that failure to meet taxonomy eligibility does not automatically mean that the company's business is not environmentally friendly.
"Our view is that the technology we offer works as an enabler of carbon removal. The work we do in improving the energy efficiency of R&D investment in connectivity solutions is not currently recognized in the EU taxonomy of sustainable finance."
(EU taxonomy reporting 2021, Nokia).
The first two sets of criteria, climate change mitigation and adaptation, will be accompanied by four other environmental criteria (sustainable use of water resources, transition to a circular economy, pollution prevention and biodiversity protection), but it is currently unclear when these will enter into force.
"The introduction of new environmental criteria has been delayed, and this makes it difficult to assess the taxonomy eligibility of companies, as well as complicating planning for the future," says Technology Industries of Finland analyst Vera Saavalainen.
The European Parliament voted on the latest delegated act under the EU taxonomy covering the climate change adaptation and mitigation potential of energy produced by natural gas and nuclear power on July 6, 2022. The result of the vote saw both activities being included in EU taxonomy.
Technology Industries of Finland welcome this outcome and believe that it is important that nuclear power and natural gas are included in the taxonomy. Power plant projects are capital-intensive, and obtaining financing on reasonable terms is a significant prerequisite for the implementation of investments. The addition of nuclear and gas energy to the taxonomy can be considered good news for Finland, where nuclear power accounts for a significant share of the country’s energy production. Nuclear power likewise has a big role in climate change mitigation and adaptation, as the demand for fossil-free energy and electricity keeps rising.
The metal industry is eligible for the EU taxonomy
The report shows that the metal industry has the largest share of activities eligible for the EU taxonomy within the Technology Industries of Finland. On average, 85 percent of the turnover of the publicly listed companies in the industry qualify for the criteria of the taxonomy. The discovery is surprising due to the assumptions about metal processing activity and the significant burden to the environment from the process.
"Technology Industries of Finland supports the establishment of a science-based sustainability classification based on clear indicators and life cycle analysis. The EU Sustainable Finance Taxonomy is an effective tool to achieve this goal. However, for the taxonomy to become the leading instrument to define criteria for sustainable investments, it should be adjusted to prevent the risk of many sustainable technology companies being excluded from it," Saavalainen points out.
The possible exclusion of a large percentage of technology firms that lead the way on sustainability from the EU taxonomy directly reduces the investment potential of the companies in question, and the technical limit values threaten to create harmful assumptions for different technologies. Technology companies such as Nokia, which are helping pioneer low-carbon technology, may therefore find themselves ineligible under the taxonomy, demonstrating that it leaves room for improvement. The classification must be absolutely reliable, so that the EU taxonomy does not lose its credibility or its intended effects to control sustainable financing within the EU.
Text: Jenna Laine & Vera Saavalainen