How does Cargotec interpret the EU Taxonomy regulation?
Cargotec disclosed the EU Taxonomy eligibility KPIs for the first time in its Annual Report 2021 (see Disclosure on non-financial issues, in Board of Directors’ report). Defining the share of taxonomy-eligible activities in Cargotec’s turnover, capex and opex required interpretation. For those interested in the Taxonomy in more detail, I wanted to increase the transparency by sharing our thinking process behind our high eligibility numbers.
AUTHOR: NOORA JUKKOLA
Cargotec’s activities are not a perfect match with any of the Taxonomy categories so the questions we have been pondering include: is Cargotec in scope of the EU Taxonomy? How should we read the technical screening criteria to make them applicable for Cargotec’s activities? How do we define “substantial emission savings” in lack of explicit criteria? Shall we focus on the technology applied or the performance provided by the activity? Despite all these open questions, I see the EU taxonomy as essential to involve the investors into sustainability. We have decided to take an active role in interpreting the EU Taxonomy, and align our interpretation with the 1.5 degree climate ambition.
EU climate targets require transparent financing for sustainable growth
The EU aims for climate neutrality by 2050, including an intermediate target of 55% net reduction in GHG emissions by 2030. The EU taxonomy establishes a classification system to provide a common language so that companies, investors and policymakers have a common understanding of which economic activities are environmentally sustainable. It’s vital to direct capital into sustainable investments in order to reach these climate goals. Cargotec is committed to 1.5 degree ambition: reducing the GHG emissions across the value chain at least 50% by 2030 from a 2019 base year.
Cargotec offers cargo and load handling solutions mainly for the transport and manufacturing sectors that are both included in the EU Taxonomy as they are among the prioritised high emitting sectors. Cargotec has the potential to enable emissions reductions in those sectors by offering low carbon equipment and intelligent solutions to customers.
Cargotec is 100% EU Taxonomy-eligible
100% of Cargotec’s turnover, capex, and opex are associated with taxonomy-eligible economic activities. Taxonomy-alignment will be reported in Annual report 2022.
Eligibility means that the activity is described in the delegated act, more precisely eligibility indicates match with the activity description. Alignment means meeting the technical screening criteria. In other words, eligibility determines if the activity is relevant (for Cargotec, in light of climate change mitigation) and alignment if the activity is sustainable. Our eligibility assessment was conducted on a high level based on the NACE codes.
We have started the Taxonomy eligibility assessment with a top down approach, which means understanding the economic activities on a group level based on the NACE codes. In principle, Cargotec’s equipment falls into C28 Manufacture of machinery and equipment n.e.c., service to C33 Repair and installation of machinery and equipment, and software to J62 Computer programming, consultancy and related activities. The respective activities in EU Taxonomy are: 3.3 Manufacture of low carbon technologies for transport, 3.6 Manufacture of other low carbon technologies, 6.12 Retrofitting of sea and coastal freight and passenger water transport, 8.2. Data-driven solutions for GHG emissions reductions.
The eligibility could be assessed with a different approach, giving less emphasis to the NACE codes and paying particular attention to the description of the activity. While assessing the Taxonomy alignment during 2022, we are planning to revisit the eligibility assessment and our judgement of relevant Taxonomy categories may change as a result.
The upcoming alignment assessment will be more detailed: we will assess Cargotec’s activities more closely in order to judge their alignment with the technical screening criteria. To be fair, a lot of interpretation is needed since cargo and load handling, or port operations are not recognised as a separate activity in the Taxonomy.
We assess eligibility from performance point of view
The aim of taxonomy is to direct capital into sustainable investments. Thinking of Cargotec as a provider of cargo and load handling solutions, the negative climate impact (especially from the use of the equipment, i.e. customers’ operations) is high but can be mitigated with the low carbon technologies. In EU Taxonomy, transport and manufacturing are among the prioritised high emitting sectors, and while those are the sectors of our customers, Cargotec’s activities are categorically relevant. From this perspective, Cargotec’s high taxonomy eligibility is justified on a high level. Moreover, given the taxonomy objective to direct capital flows: the conventional diesel powered equipment shall be eligible but not aligned, so that they will never be considered environmentally sustainable. In the recently published FAQ document, the Commission has advised that a car manufacturer would be able to report as eligible all their car manufacturing activities, including those of combustion engine cars. For these reasons we consider all our equipment as taxonomy eligible in 2021 disclosure.
There are conservative views that suggest assessing eligibility strictly based on the description of the activity, instead of focusing on the performance. The descriptions of the activities focus more on the technology. We want to focus on the performance provided by the equipment instead of the technology applied on it. The technology has no value as such, but the value is created through the performance of the equipment. The activity 3.6. Manufacture of other low carbon technologies is a good example for this consideration as it is stated to cover manufactured technologies that are “aimed at substantial life cycle greenhouse gas (GHG) emission savings in other sectors of the economy”. If this is understood purely as the technology, it is obvious that conventional technologies, such as combustion engines, would not qualify (i.e. eligibility 0%).
In my opinion it makes sense to understand the activity in terms of the performance: such as cargo or load handling in terms of container moves or lifts. As an example, a container move would be considered taxonomy eligible regardless of weather performed by a conventional diesel powered equipment or a low carbon electric version of the equipment. Consequently, they both are taxonomy eligible but only the move performed by the electric equipment would be considered taxonomy-aligned. This approach is also consistent with our LCA calculations where the functional unit is typically defined as the product’s performance over its expected lifetime. What matters is the substantially lower GHG impact on a life cycle basis compared to the baseline solution.
In our thinking, high eligibility combined with low alignment percentage indicates high climate change mitigation potential. For Cargotec this is true, the offering consists of conventional and low carbon solutions that provide the same functionality, while the conventional solutions are still more common in many market areas.
Considering mobile equipment as transport vehicles would diminish the need for interpretation
Cargotec’s equipment is intended to be used in the transportation value chain but in terms of EU Taxonomy activities, the equipment could fall into 3.3 or 3.6, depending on whether it is considered as a road vehicle or a non-road mobile machinery. The taxonomy activity 3.3 (Manufacture of low carbon technologies for transport) is not directly applicable for non-road mobile machinery but there are elements that can guide our interpretation regarding Cargotec’s equipment. The technical screening criteria under the activity 3.3 are more explicit, referring to e.g. “zero tailpipe emissions” as opposed to the activity 3.6 (Manufacture of other low carbon technologies), where the technical screening criteria leaves ample room for interpretation of terms such as “substantial GHG emission savings” or the comparison with “the best performing alternative” on the market.
We consider the mobile equipment of Cargotec potentially eligible for both activities 3.3. and 3.6. While awaiting further guidance from the Commission, we plan to continue assessing the applicability of the activity 3.3. for the non-road mobile equipment. We will also see how our interpretation of the technical screening criteria for 3.6 can be guided by the more explicit criteria for 3.3.
Cargotec will publish its Taxonomy-alignment in 2022 annual review
We will continue working on our EU Taxonomy interpretation and renewal of our Eco portfolio criteria during 2022. Our intention is to align the Eco portfolio criteria with the EU Taxonomy as far as possible.
To ensure the science base of our climate actions, we are conducting product life cycle assessments (LCAs) to prove their life-cycle GHG emissions savings. With the LCA results, we will be able to judge which solutions significantly reduce the life cycle emissions in the activities they perform and would then qualify as taxonomy aligned. Cargotec will publish its taxonomy alignment in its 2022 Annual review but already now, while we continue reporting our eco portfolio sales in the interim reports. We estimate that a fair share of Eco portfolio solutions will be considered taxonomy-aligned. In 2021, 19% of Cargotec’s turnover came from Eco portfolio solutions.
Besides the climate change mitigation objective of the EU Taxonomy, Cargotec can also contribute to the transition to a circular economy. We look forward to the publication of the delegated regulation for the circular economy related technical screening criteria to be able to consider those in the creation of our Eco portfolio criteria for circular solutions.