EU Taxonomy sheds light on green assets, sometimes

Everyone wants a sustainable European economy, and to help achieve that the European Commission’s new Taxonomy Regulation has an important part to play. It classifies economic activities according to six environmental objectives.

For activities to be treated as ‘green’ they need to address climate change, sustainable use of water and marine resources, the circular economy, pollution or biodiversity and ecosystems. At the same time, they must avoid causing ‘significant harm’ in various ‘environmental’ areas, such as whether activities respect basic human rights and employment standards. The Taxonomy sets out complex rules on what qualifies and what doesn’t.

Based on the Taxonomy, banks and other finance companies are now in the process of starting to disclose what proportion of their activities are exposed to eligible and non-eligible activities. Non-financial companies, mainly those listed on stock markets, will also describe their taxonomy-eligible activities in their annual reports.

For banks with leasing subsidiaries financing renewable energy assets, it’s good news as this will increase the bank’s exposure to eligible environmentally sustainable activities. The challenge for lessors is whether they know enough about their clients’ use of assets to be able to classify the agreements as eligible.

Inevitably, many leases will have to be assumed not to be green. That doesn’t make sense when almost all new lease agreements replace less sustainable, more polluting older equipment.  Leaseurope is calling for policy makers to recognise the benefits of European businesses replacing old equipment with more sustainable assets, whatever activities they are being used in.

For now, the focus on activities rather than assets isn’t a big problem. The level of eligible activities carried out doesn’t directly impact capital or profitability. In the longer term, however, we can expect banks and other finance companies will be rewarded for increasing their lending for eligible sustainable purposes, and even penalised for lending for the most polluting non-eligible purposes.

Leaseurope’s Accounting and Taxation Committee is launching an expert working group on sustainable reporting that will be part of the broader efforts of the Federation to help ensure we can show how leasing in Europe benefits the environment.  Leaseurope is also arranging a series of online seminars on the issues and opportunities for leasing and rental firms, details are available through our secretariat or member associations.