Importance of the EU taxonomy for investors who invest in non-listed assets

The taxonomy of the EU has had a major impact on the distribution of capital between investors and the valuation of investments, this trend will continue. However, what are the implications for investors who invest in non-listed assets, and how can these investors succeed in sustainable development? Let’s consider this theme right now. You can also read about the impact of the EU taxonomy on financial market participants here.

The value of ESG and EU taxonomy

ESG is an important factor in how investors evaluate the reasonability of investing in particular private equity. The trend to evaluate ESG and EU taxonomy indicators is largely due to the changing market demand and the growing desire of asset owners to invest in solutions that are sustainable.

The EU taxonomy is a modern tool for monitoring sustainability performance in the financial services sector. Taking into account the interest of asset owners in sustainable development and the strengthening of regulatory oversight with the EU Sustainable Finance Action Plan, in accordance with the Sustainable Finance Disclosure Regulation (SFDR), it is significant that the impact of investments on sustainable development is quantified and commercialized to obtain values.

So, what implications will the EU taxonomy have for investors in assets that are not listed on the stock market, and how can they remain leaders in sustainable development?

High consistency with EU taxonomy influences the value

Asset owners who allocate capital to address climate and environmental challenges, thanks to the EU taxonomy, have access to measurable and standardized methods for evaluating the performance of private equity.

Thus, the value of enterprises with a high level of compliance with the EU taxonomy is expected to increase as the market demand for products and services is rising. In addition, investors are increasingly directing capital to such companies.

Incorporation of the EU taxonomy into the fund strategy and activities

SFDR provided companies with the same conditions for integrating sustainability objectives into the fund’s strategy, allocating finances, and tracking sustainability metrics. Thus, investors and underlying funds that take into account major adverse impacts are required to classify their fund’s sustainability claims and marketing with predetermined fund characteristics in accordance with Articles 6, 8, or 9 of the SFDR.

The growing interest in company compliance with the EU taxonomy will require private equity companies to launch funds in accordance with Articles 8 or 9. As a result, investor satisfaction will be achieved, there will be an increase in investment in climate and environmental targets and clear documentation of company performance through reporting on harmonization with EU taxonomy.

Financial market participants who invest in registered assets have access to EU taxonomy compliance data. For example, portfolio adjustment information is available through different data providers.

Thus, investors do not need to urgently cooperate with investee companies on reporting requirements in accordance with the taxonomy.  To commercialize equities and make a profit, taxonomy must be integrated. This will facilitate effective communication with investors and the correct valuation of portfolio companies.

Reappraisal of strategies 

Integrating the EU taxonomy into sustainable development initiatives requires strategies to be re-evaluated, changes need to be reflected in CAPEX, and taxonomy needs to be aligned with reporting.

The taxonomy will play a key role in determining whether sustainable finance strategies will work, especially for investments in complex industries such as heavy industry, metallurgy, chemicals, and transportation.

Cost of developing and executing a plan

When investing in hard-to-reach sectors, investors should take into account the costs involved in developing and implementing a green transition plan. This will enable the company to meet the market demand for sustainable products and services.

At the end of the standard 5-year private equity holding period, the implementation of environmental objectives will be reflected in capital expenditures. At the same time, the reporting will be consistent with the requirements of the EU taxonomy, as evidence of the implementation of the strategy. This will not only increase the share of the EU taxonomy in sustainable development strategies but will also increase the value of the company, as there will be competition for the allocation of capital to achieve climate and environmental goals. 

Public procurement and companies whose activities are aligned with the EU taxonomy

Public procurement is expected to be predominantly focused on goods and services that contribute to the achievement of climate and environmental goals. The proof of this claim is the EU recovery plan after COVID-19.

For companies that plan to take part in government initiatives, especially in hard-to-reach sectors, the ability to demonstrate and document alignment with the EU taxonomy will be an advantage. Perhaps consistency with the EU taxonomy will in some cases be a prerequisite for participation in the competition. In addition, it is expected that when applying for infrastructure projects:

• offshore wind farms;
• bridges;
• roads, etc.

The consistency of the company’s activities with the EU taxonomy will be an important parameter for the final selection, as this data demonstrates the actual impact of companies on sustainability taking into account climatic and social problems.

In this way, European governments are contributing to the business case for the alignment of companies with the EU taxonomy by integrating the initiative into public procurement. This allows them to correctly evaluate companies’ proposals while meeting national CO2 reduction and other circular economy and biodiversity targets.

Final thoughts

The taxonomy of the EU and SFDR has a revolutionary impact on the principles of allocation of private and public capital. In the modern world, when investing, activities toward sustainable development play a decisive role. Therefore, it is important that investors use sustainability ideas based on the EU taxonomy in their fund strategies, sustainability initiatives for PCs, and proposals for large infrastructure projects, as this will increase profits and the likelihood of winning public tenders.

If you need help with EU taxonomy reporting, you can contact the Celsia team of experts. The target of the company is to make sustainability scoring simple and efficient, providing both small and large enterprises with the possibility to participate in the green financing system.

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