Climate Change Mitigation Takes the Lead: EU Taxonomy-Aligned and Eligible Activities in Relation to Debt Financing

This study assesses the degree of alignment with and eligibility to the EU Taxonomy of non-financial firms and investigates itsrelationship with their Cost of Debt (CoD). The empirical analysis is based on a sample of 306 non-financial firms listed on theStoxx Europe 600 Index across 15 European countries. Taxonomy-related data were manually collected from firms' 2023 an-nual reports to develop novel EU Taxonomy-weighted indices capturing both alignment and eligibility across Turnover, capitalexpenditure (CapEx), and operational expenditure (OpEx). Results reveal that, on average, firms align only a limited portionof their economic activities with the EU Taxonomy's requirements. Initiatives implementing the EU Taxonomy have primarilyconcentrated on climate change mitigation, while progress on adaptation and other environmental objectives has remained con-siderably limited. The findings also show that firms with a higher proportion of the EU Taxonomy-aligned Turnover benefit fromlower borrowing costs, suggesting that financial markets perceive these firms as less risky and more transition-ready.