With EU Taxonomy being one of the hottest topics of sustainable investing, we decided to take a look at which Croatian and Slovenian companies are eligible with Taxonomy (meaning that some of their revenues fall under the activities which might be aligned with the Taxonomy).
The EU Taxonomy is a glossary that defines Paris Agreement aligned performance criteria over a set of economic activities. It recognizes as green, or ‘environmentally sustainable’, economic activities that make a substantial contribution to at least one of the EU’s climate and environmental objectives, while at the same time not significantly harming any of these objectives and meeting minimum social safeguards.
EU Taxonomy quantifies the percentage of revenue of underlying assets that sit within taxonomy eligible activity. According to the European Commission, Taxonomy is an important enabler to scale up sustainable investment and to implement the European Green Deal. Notably, by providing appropriate definitions to companies, investors and policymakers on which economic activities can be considered environmentally sustainable, it is expected to create security for investors, protect private investors from greenwashing, help companies to plan the transition, mitigate market fragmentation and eventually help shift investments where they are most needed.
The Taxonomy Regulation entered into force on 12 July 2020 and establishes six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
We note that so far, only the first two objectives (climate change mitigation and climate change adaptation) were set into place. In order for asset managers to have a unified criteria when determining the sustainability of their investment strategy, companies will have to comply with taxonomy in terms of revenues, CAPEX and opex.
Currently the following sectors are taken into taxonomy consideration:
- Forestry
- Agriculture
- Manufacturing (plastics, chemicals, cement, aluminium, etc.)
- Electricity, gas, steam and air conditioning supply
- Water, sewerage, waste and remediation
- Transportation and storage
- Information and communications
- Construction and real estate activities
What does all of the above mentioned mean for Croatian & Slovenian companies?
Companies in Croatia and Slovenia will have to comply by a set of rules of the Taxonomy Regulation according to which asset managers will be able to note the percentage of taxonomy aligned revenues.
According to Bloomberg, in Croatia, there are currently 6 companies eligible with Taxonomy (meaning that some of their revenues fall under the activities which might be aligned with the Taxonomy). However, we note that it does not indicate that those activities have met substantial contribution criteria. Note that Bloomberg combined/split some of the sectors mentioned above, but they are all still being taken into consideration.
As visible from the graph, currently AD PLastik, HT, Atlantska Plovidba and Dalekovod have a 100% eligibility, followed by Končar (99.6%) and Podravka (27.3%).
Croatian & Slovenian Companies Eligible with Taxonomy
Source: Bloomberg, InterCapital Research
On the Slovenian market, according to Bloomberg, we see 5 eligible companies. 3 of them have a 100% eligibility – Telekom Slovenije, Luka Koper and Intereuropa. Meanwhile Petrol has 2.3%, while Krka has 1.9% eligibility. However, one has to note that it is also possible that Bloomberg did not retrieve such data from the companies, so we should take Bloomberg’s data with a grain of salt when giving a conclusion about an entire market. In the following periods we would be happy to see more companies included and more accurate data on both markets.
Why is this important?
Besides the obvious answer of increasing the transparency of sustainability of business practices of regional companies and, therefore, protecting investors from greenwashing, this will also be a possible screening practice of asset managers in portfolio construction. In other words, asset managers abiding by the Article 9 (and some Article 8) of the Sustainable Finance Disclosure Regulation (SFDR) will have to set a target in terms of percentage alignment with Taxonomy. Hence, asset managers which set a minimum taxonomy alignment percentage of their fund might exclude certain companies from their screening (which fall below a set threshold). With a potential growing number of asset managers abiding by Article 9, this might have a positive/negative impact on a company’s stock price, depending on how taxonomy aligned it is.
The Credit rating agency, S&P, affirmed Serbia’s credit rating at BB+, only a notch under the investment grade rating.
OUTLOOK
The stable outlook balances lingering risks from the COVID-19 pandemic to Serbia’s fiscal performance over the next 12 months against the potential for the country’s external position to strengthen, particularly if foreign direct investment (FDI) inflows remain resilient while the global recovery strengthens.
RATIONALE
S&P’s ratings on Serbia are supported by still-moderate public debt—yielding some fiscal space for the government to implement countercyclical policies–and a credible monetary policy framework. The ratings are constrained by the country’s relatively theyak institutional settings, comparatively low economic theyalth levels, a sizable net external liability position, and the still-extensive use of euros in the economy.
Institutional and economic profile: Less rigorous lockdown restrictions, substantial policy support, and the resilience of key sectors have limited the pandemic’s effect on Serbia’s economy
- They project real GDP will expand by 5% in 2021, supported in part by a third fiscal package.
- Nearly 40% of Serbia’s population has received at least one vaccine dose, but risks related to vaccine efficacy against coronavirus variants remain and could weigh on economic growth and fiscal outcomes.
- With fresh elections due next year, the government’s short two-year term could detract from its medium-term reform agenda.
They expect the Serbian economy to expand by 5% in real terms in 2021 after a relatively mild contraction of 1% in 2020. The number of employed continued to increase last year, although the fall in the unemployment rate was also attributable to workers exiting the labor market. The economy reached and exceeded its prepandemic level in the first quarter of this year.
Relative to many other countries, including in the region, Serbia had a much shorter period of stringent COVID-19-related containment measures. Authorities curbed subsequent waves of infection with fewer restrictions–for instance, via limits on business hours for most nonessential businesses and entertainment venues. Serbia’s construction and manufacturing sectors remained resilient, and the economy’s reliance on sectors most hit by the pandemic such as leisure and hospitality is limited.