Many of the hardest-hit sectors, including oil & gas, cars and aviation, have business models that were already under pressure before the crisis from rapidly changing market dynamics and ever-tighter climate regulations. The generous recovery packages on offer, together with the particular circumstances of the crisis, provide them with the opportunity to make bold and ambitious changes that might otherwise have been challenging to implement.
How companies respond to the stimulus, and how they adjust their strategies, will determine their future profitability and long-term competitiveness.
In the EU, the conditions attached to the stimulus will be a defining factor. Policymakers can implement recovery packages that may either act as a catalyst for change, setting these companies on the right transition pathway, or lock in their unsustainable business models and waste taxpayers’ money.
The European Commission has proposed that the sustainable taxonomy – the official EU classification of economic activities and the conditions under which economic activities can be considered sustainable – guides investment in Europe’s recovery to ensure alignment with the EU’s long-term ambitions.
How can the EU taxonomy be applied?
We believe governments need to emphasise support that helps companies become sustainable from an economic, social, and environmental perspective. Priority should be given to setting companies on the right transition path.
Any firm in a carbon-intensive sector that receives a bespoke or large taxpayer bailout should develop a detailed strategy to achieve carbon neutrality by 2050 at the latest. Transition plans should include short, medium, and long-term targets, and a social impact programme that addresses potential socially adverse impacts on employees, for example, by retraining employees.
The taxonomy could and should guide companies, investors, project promoters and other stakeholders, including policymakers, in the transition to a low-carbon, resilient and resource-efficient economy. Its uniqueness lies in the fact that it is consistent with EU environmental goals, including intermediate targets and a procurement plan for Europe to achieve carbon neutrality by 2050.
It is important to differentiate between improving the environmental performance of existing assets and ensuring that all future facilities make the maximum effort to be aligned with the low-carbon transition.
The taxonomy as a guide to investment, grants and loans
The taxonomy is well suited to guiding new investments, so it should inform companies’ decisions on future investments. These should be directed towards contributing substantially to climate change mitigation (compatible with achieving carbon neutrality by 2050), while avoiding significant harm to other objectives such as biodiversity or clean water. Oil & gas companies, for example, should prioritise investment in renewables or green hydrogen and reduce exposure to assets that risk being stranded.
Recovery investment, grants and spending should not create greater hurdles to the achievement of EU environmental goals or violate social standards. The taxonomy provides the EU with criteria to ensure all investments cause no significant harm (Do No Significant Harm criteria within the taxonomy) in the environment and society (social standards embedded in the taxonomy).
To claim alignment with the taxonomy, economic activities need to substantially contribute to one of the six environmental objectives and not significantly harm any other
Strengthening governance structures
In parallel, there is growing pressure to strengthen the governance of companies in the area of sustainability (included in the EU Action Plan on Sustainable Finance). The recently agreed recovery stimulus plan should reinforce this trend: this time around, public support from the EU and in many (but not all) other regions will and should come with green strings attached.
In return for support, companies should also strengthen their governance structures in these ways:
- Make alignment with the Paris Agreement goals, or carbon neutrality by 2050 at the latest, in line with the EU taxonomy, part of their articles of association
- Place responsibility for their transition plans at board level
- Link long-term and variable executive remuneration to progress in their transition plan
- Ensure alignment of lobbying and advertising activities
- Report annually on progress made.
Towards a sustainable recovery
Since recovery packages can serve as a catalyst for change, we believe companies should present and commit to transition paths in line with the EU taxonomy as well as strengthen their governance structures in return for support.
In Europe, the taxonomy could form the basis of green transition plans, in combination with the governance and strategy principles of the TCFD, as expressed in the disclosure recommendations of the European Commission’s Technical Expert Group on sustainable finance.
This is a great opportunity to enshrine long-termism in companies’ modus operandi and to emphasise the importance of ensuring returns to long-term shareholders, while at the very least causing no adverse impacts to other stakeholders.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
 The EU taxonomy is a tool to help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy, for further information see https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf
 The EU has developed a strategy, with specific targets, for each of the six EU environmental objectives - the attenuation of climate change, adaptation to climate change, the sustainable utilisation and protection of water and marine resources, the prevention and reduction of pollution, and the transition towards a circular economy, biodiversity and recycling.