• Christian Klein

"Take the lead."

With its rules on taxonomy, the EU will initiate a massive transformation of the economy, Christian Klein, Professor of Sustainable Finance at the University of Kassel, is convinced: "For SMEs, this is an opportunity."

I'll venture a prediction. The European Union's taxonomy will be a real gamechanger. It will redirect money flows from unsustainable to sustainable business models and help us achieve the goals of the Paris climate agreement. Because it will completely change the way we do business, it is high time to take a closer look at it.

First of all, taxonomy defines nothing more than a list of rules for economic activities. It says, for example, that if you manage to produce a tonne of steel by emitting a certain amount of CO2, you are taxonomy compliant. There will soon be similar specifications on biodiversity, on circular economy and later on social aspects - do suppliers meet certain standards? How are employees treated? What about occupational health and safety?

I compare this to a tool. The taxonomy is the hammer. And now we can consider what can be done with such a hammer. Theoretically, for example, it is conceivable to oblige the statutory insurance companies to invest their pension reserves only in taxonomy-compliant companies. Or requiring all banks to lend only to these companies. I didn't make that up. There are actually rumors that something like this is being considered.

In order for this to be implemented, companies with more than 500 employees will be required to provide evidence of the relevant data from 2022: What percentage of sales are based on taxonomy-compliant activities? And what percentage of investments generate such?

I now know from talking to small and medium-sized business leaders that many are sitting back in relief because they are exempt from this reporting requirement. Make no mistake. At some point, this will all become an issue for you as well. Because if you think it through to its logical conclusion, the message from the EU Commission is: anything that is not taxonomy-compliant is not sustainable and therefore not fit for the future. After all, taxonomy does nothing other than put its finger in the wound and show which business models have a long-term perspective. And which ones do not.

Of course, this will have consequences. At some point, banks will have to disclose the taxonomy compliance of their loan portfolios. And by then at the latest, every house bank will also approach its SME client and demand: "Tell us what you are doing. How taxonomy-compliant are you, anyway?"

Please do not panic now. This is not a threat, but on the contrary a great opportunity. I'm convinced that most SMEs manage quite well to prove their taxonomy compliance. In fact, if they take care of it early, they can get a huge head start.

I'm already getting a lot of enquiries from large insurance companies and banks who now want to become sustainable as well. So I'm pretty sure the moment will come when investors will be desperate to find companies to invest in that are taxonomy compliant so they can rebalance their portfolios accordingly.

Those who are then ahead will not only benefit in terms of financing. Your external image will also improve significantly. You can actively communicate to your customers that you are acting sustainably and making a major contribution to achieving climate targets. And you will attract capable employees in times of scarce human resources. We have long known from research that Generation Y can no longer be lured with money alone. Young people with potential are looking for responsible work, real meaning and an employer who shares their views.

My impression is that the staff of the EU Commission are absolutely ready for dialogue when it comes to designing the taxonomy. They listen with interest when SMEs and family businesses get involved. Do not duck away. Act proactively. Get involved. Be at the forefront of the movement. ®