It's not. Here's what I see if I go to book a flight on Icelandair's website:
The premium cabin is sold as "Saga Premium," as also shown on their services page. Their fleet pages depict "Saga Premium" and "Economy" classes, not business. Which strikes me as fair. It's clearly a premium service as compared to economy, even if there aren't all the benefits you could hope for.
They used to have a third "Economy Comfort" class in between, but it never made much sense, was weirdly inconsistent so nobody knew what they were actually getting, and they got rid of it.
As Carl notes in a related question, Saga Premium may show up as "business" on some third-party booking sites. These sites are limited by the commonalities of the GDS booking systems and do not generally have the capability to display custom labels for cabin classes. In Icelandair's case, they used to offer three classes until last year, so I suspect it made sense for them to map the now-discontinued Economy Comfort to "Premium Economy" and Saga Premium to "Business," since GDS systems don't let you make up arbitrary names.
Ultimately, there is no standard definition for the quality of service to be provided in any particular class, so it's something you have to research on an airline-by-airline and even flight-by-flight basis, as the product may depend on the route or aircraft being used.