The EU Taxonomy is designed to steer capital flows toward environmentally sustainable investments, directly influencing sectors critical to climate action. Among these, the energy sector stands out due to its dual role as both a major greenhouse gas (GHG) emitter and a vital enabler of economic growth.

Some background…

According to the European Commission, energy production and consumption are responsible for around 75% of the EU's direct GHG emissions, with the energy supply sector alone accounting for over 20%. This makes the sector's transformation imperative for meeting the EU's climate targets, including a 55% reduction in CO2 emissions by2030.

Data shows that the energy sector, particularly utilities, is leading in reporting alignment with the EU Taxonomy, with around 30% of EU utilities reporting alignment (Morningstar sustainalytics, 2023).

The disparity between utilities and the broader energy sector in EU Taxonomy alignment reporting stems largely from differences in market positioning and business models:

Utilities, responsible for generating and delivering energy to end-users, operate under tight regulatory oversight and face direct public and customer expectations around sustainability. This visibility, coupled with their growing investments in renewable energy, makes Taxonomy alignment both more attainable and strategically beneficial.

In contrast, the broader energy sector includes upstream activities like fossil fuel extraction and refining operations that are less visible to consumers and often excluded or heavily constrained under the Taxonomy criteria, for obvious reasons. For these companies, alignment is either technically challenging or reputationally risky, particularly if their core business remains carbon-intensive.

Investor pressure further reinforces this divide. Utilities tend to attract stakeholders with strong sustainability mandates, while many traditional energy companies prioritise profitability over sustainability reporting unless actively transitioning to greener models.

As a result, utilities are naturally better positioned to engage with the EU Taxonomy, whereas much of the energy sector remains hindered by structural and strategic barriers.

Nevertheless, it is precisely this unique position what allows energy suppliers that invest in greener operations to unlock financial, regulatory, and market benefits, positioning themselves for long-term relevance and profitability in a decarbonising global economy.

Why resort to the EU Taxonomy?

The EU Taxonomy is reshaping investment patterns and business strategies within the energy sector, which is why companies, even under a voluntary framework, decide to:

• Develop detailed roadmaps for sustainability.
• Assess and transparently report their environmental impact.
• Align investment decisions with Taxonomy criteria to secure investor confidence and potentially lower capital costs.

For investors, the Taxonomy offers a standardised metric for evaluating the sustainability of energy investments, supporting risk assessment and portfolio diversification.

Turning “green” secures enhanced access to finance, improves the reputational standing of companies among their stakeholders, and mitigates regulatory risks by aligning the company’s strategy with the EU’s policy goals as regards sustainability.

On top of that, from a strategic business development perspective, the Taxonomy assessment can uncover areas for:

• ‍Process optimisation: Identifying operational improvements that further reduce the environmental impact of energy-related products and services.‍
• Innovation roadmapping: Aligning product development with EU sustainability priorities, including circularity and energy efficiency.‍
• Market expansion: Enhancing eligibility for projects or funding that require suppliers to meet sustainability criteria.

Let’s get technical

As explained, utilities exhibit the highest alignment levels, with approximately 30% of companies reporting alignment achieving 100%.

This success is largely due to investments in renewable energy sources like solar and wind, which inherently meet Taxonomy criteria without extensive technical scrutiny, provided they do not harm other environmental objectives and meet minimum social safeguards.

The Taxonomy framework mandates reporting across three Key Performance Indicators (KPIs): Revenue, CapitalExpenditures (CapEx), and Operating Expenditures (OpEx). Utilities show a higher degree of eligibility and alignment in CapEx compared to revenue and OpEx. This suggests that while current income streams may still rely on non-sustainable sources, significant investments are being directed toward transitioning energy portfolios to sustainable alternatives.

The upcoming EU Taxonomy reform is set to significantly reduce the reporting burden.

Planned changes include:

• A 64% reduction in required data points, simplifying the data collection process.
• Reduced barriers to proving the 'Do No Significant Harm' (DNSH) criteria, easing compliance.
• Introduction of financial materiality thresholds, allowing companies to report alignment for relevant KPIs without exhaustive reporting on less material areas.
• The option to report partial alignment, providing more flexibility in sustainability disclosures.

These reforms make Taxonomy reporting even more accessible and attractive, lowering the bureaucratic barriers while retaining the strategic advantages of alignment.

The so-called “Transitional Activities”

A contentious aspect of the EUTaxonomy is the inclusion of nuclear and natural gas energy under the category of transitional activities. This classification permits these energy sources to be labeled “green” if they replace more harmful fossil fuels like coal, under strict environmental and social criteria.

This decision has sparked significant debate among EU member states, environmental activists, and policy makers. Critics fear that labelling gas as “green” may delay the transition to truly renewable energy sources.

Although a new natural gas plant emits approximately 50-60% less CO2 than a new coal plant, very few existing natural gas plants meet the stringent technical criteria set by the EU Taxonomy to qualify as green.

Meeting these criteria poses significant challenges, including the high cost of implementing carbon capture technologies and the persistent issue of methane leakages across the gas value chain.

Similarly, for nuclear energy to qualify under the Taxonomy, providers must comply with strict requirements. Nuclear plants must have construction permits issued by 2045, transition to accident-tolerant fuels by 2025, and comply with specific standards for the safe disposal of radioactive waste.

The Influence of the EU Taxonomy on Energy Procurement

The significance of the EU Taxonomy extends well beyond the energy sector. Many industrial and commercial activities across sectors must demonstrate their sustainability by showcasing their reliance on renewable energy sources.

Whether through manufacturing processes, service delivery, or facility operations, access to renewable energy is increasingly becoming a cornerstone of sustainability reporting and Taxonomy alignment.

As companies across diverse sectors strive to improve their Taxonomy alignment, they are more likely to scrutinise their energy providers. Those in the utilities market that fail to assess and disclose their own alignment risk being overlooked in favour of competitors who can prove their adherence to Taxonomy standards.

Given that 30% of the utilities market currently reports alignment, there is a tangible competitive advantage for renewable energy providers who can position themselves as fully sustainable.

Renewable energy suppliers not only fulfil an environmental imperative but also unlock business opportunities by aligning with the growing demand for sustainable sourcing from downstream industries.

In this context, neglecting Taxonomy alignment could mean missing out on significant market share, particularly as sustainability criteria become integral to procurement policies and investor due diligence.

In essence, by proactively assessing and reporting Taxonomy alignment, companies in the energy industry can:

• ‍Strengthen their value proposition to utilities that seek aligned suppliers to improve their own Taxonomy KPIs.‍
• Enhance visibility with potential clients prioritising sustainability criteria in procurement.

Conclusion

As the EU refines and expands theTaxonomy, including criteria for enabling and supporting activities, companies in the energy or utilities sector risk being overlooked by sustainability-driven clients and investors if alignment is not addressed.

Therefore, some recommended actions in that direction are:

• Conduct a preliminary alignment screening based on current Taxonomy criteria.
• Integrate findings into broader ESG assessments.
• Develop a communication strategy to share alignment outcomes with stakeholders.

Embracing this initiative now will allow energy suppliers and utility providers to stay ahead of regulatory trends, enhance its market positioning, and meet investor expectations.

At 414, we specialise in guiding small to mid-market companies through the process of assessing EU Taxonomy eligibility and alignment, with a keen focus on the financial markets.

Whether you’re looking to strengthen investor confidence, secure sustainability-linked financing, or future-proof your business, we can help you chart a clear, credible path toward sustainability and growth!