Companies report on four new EU Taxonomy objectives: water, pollution, biodiversity and circularity
As EU companies begin reporting their alignment with four new Taxonomy objectives—water, pollution, biodiversity, and circularity—the desk anticipates a significant uptick in overall Taxonomy alignment numbers, driven by the inclusion of these new criteria. Per the full note from Nordea, Marco Kisic indicates that companies' eligibility under these objectives should expand the sustainable investments universe and could enhance average alignment next year. This may have implications for market segments related to sustainability-focused investments as institutional traders factor in this evolving framework into their strategies.
What the desk is arguing
The desk posits that the recent reporting on the EU's Taxonomy objectives indicates a pivotal shift in the sustainability landscape. This development marks the first time companies have assessed their eligibility regarding new environmental criteria, a factor that could significantly shape investment strategies going forward. Per the full note from Nordea, there is an expectation for an increase in average alignment numbers next year as more companies embrace these additional objectives.
The Nordea ESG Research team suggests that this initial eligibility reporting provides encouraging signs for future compliance and alignment, which may lead to greater investor interest in sustainably classified assets. For instance, Marco Kisic notes a likely step-up in average alignment, which would enhance the universe of investments deemed sustainable. This is particularly relevant given the growing focus on ESG criteria across investment mandates.
Where it sits in our coverage
The current consensus target for the EUR/USD pair is set at 1.075, with a range between 1.04 and 1.12. Notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Our outlook aligns with the broader market sentiment reflecting positive shifts towards sustainable investments, placing us near the higher end of the range outlined by our peers.
How other firms see it
Firms such as jpmorgan and credit-suisse align with expectations of increased sustainable investment flows, whereas bofa takes a contrarian view, suggesting caution about current pricing structures. There is a clear link between the EUR/USD trajectory and emerging sustainability legislation in the EU, with market participants likely to monitor shifts in compliance as reflected in currency movements.
What the calendar says
With no high-impact events scheduled in the immediate term, traders should remain attentive to ancillary reports that could emerge within the next month regarding the implementation of these new Taxonomy objectives, particularly as they relate to upcoming earnings reports from major EU corporations, which may signal further developments in the sustainability narrative.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01EU companies report new Taxonomy eligibility, indicating possible growth in sustainable investments.
- 02Expect higher average alignment numbers next year as more entities comply with expanded objectives.
- 03Sustainability themes may drive increased investor interest and shift in market dynamics.
- 04The EUR/USD pair reflects broader sustainability trends influencing investment strategies.
Market implications
Monitor the EUR/USD pair for movements influenced by sustainability-related news, especially as compliance reports and earnings from key EU companies could signal commitment shifts to these new objectives. Watch for levels around 1.075 to evaluate trading signals.
Risks to this view
A decline in overall compliance or backlash against EU sustainability goals could undermine the positive outlook for sustainable investments. Economic indicators or regulatory changes that detract from sustainability might also reverse current trends.
Sustainability Companies report on four new EU Taxonomy objectives: water, pollution, biodiversity and circularity 21-05-2024 EU companies recently reported their alignment with the EU Taxonomy for the second year in a row. For the first time, they also reported their eligibility under four new environmental objectives: water, pollution, biodiversity and circularity. The results bode well for companies' overall Taxonomy alignment numbers next year, according to Nordea's ESG Research team.
Until this year, companies have reported on the first two objectives of the EU Taxonomy : climate change mitigation and climate change adaptation. This year, for the first time, they started to report on their eligibility for four new objectives: water, pollution, biodiversity and circularity. The Taxonomy is the EU’s official classification system for sustainable economic activities.
An activity is considered “sustainable” if it makes a substantial contribution to one of the six environmental objectives and does not significantly harm any of the others. To be aligned with the Taxonomy, an activity first has to be eligible, or listed in the EU Taxonomy. While companies will only disclose their alignment with the four new objectives from next year, their eligibility can give us an initial glimpse into the role these objectives could play in increasing companies’ Taxonomy exposure, according to Marco Kisic , Head of ESG Research in Nordea. “We expect to see a step-up in average alignment next year, as companies start reporting under the four new environmental objectives,” he says.
That should expand the universe of investments considered sustainable. We expect to see a step-up in average alignment next year, as companies start reporting under the four new environmental objectives. Marco Kisic, Head of ESG Research, Nordea Pharma companies now eligible When the Nordic companies covered by Nordea’s equity research team are weighted equally, the majority of their Taxonomy eligibility stems from the climate mitigation objective.
However the new objectives contribute a relatively substantial ~20% of the total share of eligibility. Circular economy is the objective with the highest eligibility, associated with activities such as manufacturing of recycled plastic packaging, waste management services and the repair and sale of second-hand goods. When weighting the companies based on market cap, pollution prevention and control (PPC) accounts for the largest share of Taxonomy-eligible revenues.
The main activity associated with this objective is the manufacturing of pharmaceutical ingredients and medical products, with certain pharmaceutical companies setting eligibility at 100% of their turnover. “This is important as it gives a new set of large caps, which are not renewables, real estate or materials companies, an opportunity to show Taxonomy alignment. This bodes well for companies’ average alignment next year,” Kisic says. Nordea universe: Eligibility split by Taxonomy (equal-weighted) Source: Company data and Nordea Nordea universe: Eligibility split by Taxonomy (market cap-weighted) Source: Company data and Nordea Only few companies report eligibility under the water and biodiversity objectives, and their eligibility levels are low.
These objectives are associated with water management, conservation and accommodation activities. Get an overview of Nordic companies’ latest reporting on their Taxonomy alignment , including which sectors are leading and trailing the pack. The EU Taxonomy's 6 environmental objectives 1) Climate change mitigation 2) Climate change adaptation 3) The sustainable use and protection of water and marine resources 4) The transition to a circular economy 5) Pollution prevention and control 6) The protection and restoration of biodiversity and ecosystems Sign up for our Sustainable Finance newsletter Stay on top of the latest developments in the fast-moving world of sustainable finance.
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