Goldman Sachs GS SUSTAIN The EU Taxonomy - a potential catalyst to the Circular Economy The Platform on Sustainable Finance released its final report on the next four environmental objectives of the EU Taxonomy, covering 56 activities under water, waste & the circular economy, pollution prevention and control, and biodiversity. Circular activities are a big winner of the next phase of the Green Taxonomy, capturing 21 of 56 activities (Exhibit 23), as spare parts manufacturing, servicing or repairing, recycling, products-as-a-service, and second-hand goods, among others, are due to gain greater recognition. New industries not previously covered under the current Climate Taxonomy include apparel and footwear, food and beverage, aircraft manufacturing, passenger and freight air transport, furniture manufacturing, plastic packaging, and animal and crop production. We see circularity being a focal environmental objective alongside climate change mitigation in thematic investor decision-making. Investor attention towards tracking and following the EU Taxonomy will be unavoidable for ESG funds. The ambitions of the European Commission are to establish the Taxonomy as the definitive ‘green label’ to help capital markets facilitate the flow of capital towards sustainable outcomes. The EC must, by law, embed the Taxonomy criteria into all future relevant regulation, investment fund labels and standards, and will feature heavily in upcoming MiFID II amendments that will further catalyze the growth of sustainable investment funds, in our view. We see the Taxonomy leading to significant implications for capital flows, cheaper cost of capital and higher valuations for companies that fit into the Taxonomy — which will have significance to global ESG and generalist investors. As market sentiment potentially shifts towards supporting ESG improvers, the Taxonomy could help provide basis for owning companies in transition. Thus the Taxonomy could reshuffle the balance of what gets owned in ESG funds - presenting opportunities for ESG ‘value’ or ‘momentum’ strategies where companies require significant transition financing. Sectors originally left out or not in scope of the initial climate change activities of the Taxonomy may see renewed focus after being included under the new objectives, including manufacturing of clothing, manufacturing of food and beverages, all civil engineering activities and road maintenance, and waste services. Based on our ESG fund holdings analysis, many of these sectors are currently underweight in ESG funds, including Beverages (-29%) and Transport Infrastructure (-14%). These industries will be pivotal to accomplish climate, circularity and pollution prevention goals, and will now in whole or partially be recognized as ‘green’ under the Taxonomy where meeting the strict criteria, which could improve their investability among ESG funds. Gauging companies taxonomy-aligned capex will be critical for assessing future revenue exposures and could support ESG improver/momentum strategies. 3 May 2022 2<