The „green transformation“ poses great challenges for companies in all sectors, some of which are under immense pressure to innovate and invest. Although funding programmes are available at European, federal and state level, the politically pledged financial resources are far from being able to fully cover the necessary investment needs, which is why private capital flows have to be mobilised for transformation financing.

The good news is that many banks, insurance companies, private equity and investment funds want to invest „green“. But their commitments are often limited by information gaps. This is because sustainable activities are often hardly comparable with each other. A harmonised taxonomy for sustainable activities in the EU is now intended to standardise them. The taxonomy and the Green Bond Label are important levers for sustainable finance.

How exactly does Sustainable Finance work?

Sustainable Finance aims to redirect capital flows into sustainable and green projects. With the Taxonomy Regulation, a set of rules was created that classifies economic activities into „green“ and „non-green“. In this way, the EU taxonomy aims to facilitate the identification of environmentally sustainable economic activities in order to redirect financial flows towards low-emission technologies and to close the investment gap in the implementation of climate goals with the help of the financial market in the long term.

Based on this classification, green financial instruments such as „Green Bonds“, „ESG-Loans“ and „ESG-linked Loans“ can be developed. Such a Green Bond Standard has been created for the EU. The EU taxonomy is first relevant for companies to which the non-financial reporting obligation applies. This includes companies with more than 500 employees, including listed companies, banks and insurance companies. In addition, an application obligation for small and medium-sized enterprises is planned from the reporting year 2026. Non-listed small and medium-sized enterprises as well as micro enterprises are to remain exempt from the reporting obligation.

The EU taxonomy distinguishes between six environmental objectives: Climate change mitigation, climate change adaptation, sustainable use of water resources, shift to a circular economy, pollution prevention and ecosystem protection. Three types of activities are recognised for companies: „Green“ activities contribute directly to the fulfilment of one or more environmental goals, enabling activities support other activities in a complementary way, and transition activities are those for which there is not yet a low-carbon alternative, but which support the transition to a climate-neutral economy. For example, the use of gas for heat generation can be considered a Transition activity even though it is not green in the strict sense.

The taxonomy represents a further development of voluntary standards already in use on the market, which was implemented by a Technical Expert Group. However, it is not entirely uncontroversial, mainly because of the lack of differentiation and the threat of bureaucracy. The Climate Bonds Initiative welcomes the EU’s implementation. From the initiative’s point of view, however, the areas of forestry and bioenergy were only implemented in a weakened manner. Market observers also see the taxonomy as significantly stricter than the previous voluntary standards, as an EU Green Bond can only obtain this label through the activities defined in the taxonomy, whereas the voluntary standards were less strict. In the European Parliament, the eastern and southern member states have criticised the fact that natural gas has not been given the status of a transition activity.

If activities fall within the taxonomy, they can be financed with the Green Bond instrument. The „use-of-proceeds“ restriction applies here: the issue proceeds of a green bond cannot be used throughout the company, but only for its green activities. This makes the Green Bond an instrument for financing the transformation. This is because a company does not need to have completed the transformation to be able to issue a green bond. The companies only need green activities that can be financed with the proceeds of the Green Bond issue. This distinguishes the Green Bond from sustainability-linked loans, which only offer financing advantages for already sustainable companies.

How is the taxonomy applied?

In the case of a green bond issue, companies must disclose their activities on the basis of the turnover from the sale of taxonomy-compliant products and services. In addition, the amount of capital expenditure and operating costs incurred in connection with taxonomy-compliant planned or existing economic activities must be disclosed. If an enterprise with an activity does not yet meet the technical criteria, an investment plan may be drawn up regarding the financing of improvement measures. This should demonstrate compliance with the criteria within a certain period of time.

A standardised classification system offers a number of advantages to capital seekers and investors. Unfortunately, it is also associated with bureaucracy. The advantages are

  • The voluntary classification systems that already exist are not clearly comparable for banks, insurance companies and investment funds. They may inhibit the willingness of investors to make investments in green economic activities through the capital market. A uniform classification system would facilitate the comparability of different economic activities and thus enable the financing of green activities.
  • A standardised documentation requirement and the possibility to issue green bonds can create a signal effect for the promotion of taxonomy-compliant sustainable economic activities. Companies willing to transform can benefit from this and provide an effective macroeconomic impetus for closing the investment gap in climate protection.
  • A large number of different sustainable financial products exist on the capital market, for which the climate protection contribution of the associated assets sometimes varies greatly. A uniform taxonomy limits the risk of „green-washing“.
  • The pricing of external environmental costs into the prices and returns of financial instruments is at least facilitated. In this way, the EU taxonomy improves the information base and increases the allocation efficiency of capital between investors and borrowers on the financial market. However, it would make more sense to directly address emissions, in particular a pricing of CO2 emissions.


Are small and medium-sized enterprises at a financing disadvantage?

The question arises, however, for which companies and financial institutions the taxonomy brings financing advantages, and whether smaller and medium-sized companies will not also face obstacles in the application of the taxonomy, so that in the worst case they could even be threatened with financing disadvantages.

For the issuance of a green bond, as for bonds in general, it is only worthwhile for very large issue volumes due to transaction costs. In the case of SME bonds, these are issue volumes of between 15 and 150 million euros. This is also one of the reasons why smaller SMEs do not usually issue bonds and financing via the principal bank dominates in Germany. When issuing green bonds, however, companies‘ economies of scale increase. This is because the principle of „use of proceeds“ applies to the green bond, i.e. the proceeds of the issue may not be used throughout the company, but only for green projects. For large companies, it is therefore possible to bundle many green projects within the company and thus reach the necessary volume limit for a bond issue. This means that a green bond issue may no longer be worthwhile even for a large medium-sized company.

For small and medium-sized enterprises, so-called sustainability-linked loans are offered, which are linked to a corresponding rating of the company. This means that this type of loan is not granted according to the „use-of-proceeds“ principle, but offers financing advantages to companies that have already completed the transformation. The situation is different with green bonds. These can also be issued by a company that is not green overall but has many green activities. Due to the different availability of financing instruments, transformation financing may be easier for large companies than for small and medium-sized enterprises.

Does this mean that the taxonomy cannot support small and medium-sized enterprises in their transformation? To clarify this question, one has to take a look at the major green bond issuers in the Deutsche Bundesbank’s Green Bond Monitor. The European Investment Bank is in first place, followed by the KfW Bankengruppe, through which funding for transformation can be obtained. Behind them are France and Germany, which can use the funds collected from the Green Bond issue for sustainable infrastructure projects. This means that the Green Bond can also indirectly benefit smaller companies, provided they call on funding for their transformation.

In addition to a „financing gap“, a „profitability gap“ could also occur. This is because companies will invest when a positive return on investment is likely. Particularly in the case of medium- to long-term transformation investments, the highest possible degree of planning certainty is required.

Can NRW additionally support small and medium-sized enterprises in their transformation?

For smaller companies, it will be very difficult or even impossible to achieve the issuing volumes for a green bond. This excludes them from this important instrument of transformation financing. In order for these companies to be able to use the advantages of sustainable finance, a financing platform and the strengthening of securitisation are therefore needed: small and medium-sized companies could bundle their green projects on a financing platform, which would then issue a green bond to jointly finance these green projects and then pass on the issue proceeds to the companies, which could use them to finance their green activities. Another possibility would be to set up a securitisation platform for SME loans. Here, too, an attempt could be made to achieve a green label for securitisation. However, this presupposes that the small and medium-sized enterprises are well informed about the applicability of the taxonomy for financing their transformation. The study Transformation in NRW therefore proposed the establishment of a Sustainable Finance Competence Centre within Fin.Connect.NRW

Contact person