Pursuing sustainable finance and investment (the EU Taxonomy)
The aim of the EU's sustainable finance strategy is to reorient capital flows towards sustainable investments, manage financial risk stemming from climate change and to foster transparency.
Although green investments have existed for a while and a market practise has been established, it is still a challenge that there are no clear rules for defining sustainable investments.
What is new?
EU will establish a classification system for participants in the financial markets to identify low-carbon, resilient and resource-efficient economic activities, also known as the Taxonomy. The Taxonomy sets performance thresholds (so-called technical screening criteria) for economic activities that (i) substantially contribute to one or more of the EU environmental objectives, (ii) do not significantly harm any of the other objectives and (iii) comply with minimum social safeguards.
The six environmental objectives are:
- Climate change mitigation
- Climate change adaption
- Sustainable use and protection of water resources
- Transition to a circular economy, waste prevention and recycling
- Pollution prevention and control
- Protection of healthy ecosystems
The Taxonomy Regulation (EU) 2020/852 was adopted by the European Parliament on 18 June 2020. This regulation sets forth six environmental objectives, and the overall framework for the Taxonomy.
The regulation also amends the Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector, so that financial market participants offering financial products in Europe and companies subject to disclosure requirements under the Non-Financial Reporting Directive (NFRD) must now incorporate disclosures with reference to the Taxonomy.
In March 2020 a Technical Expert Group published its final report with technical screening criteria for economic activities that are considered to contribute to the two first environmental objectives – climate change mitigation and adaption. These detailed rules will be adopted by the European Commission as a delegated regulation by the end of 2020 and enter into application by the end of 2021.
The second set of technical screening criteria, which cover economic activities substantially contributing to the other four environmental objectives, will be adopted by end 2021 and enter into application by end 2022.
Who has to do what and by when?
The Taxonomy Regulation sets out three groups of taxonomy users:
- Financial market participants offering financial products in the EU, including occupational pension providers;
- Large companies who are already required to provide a non-financial statement under the Non-Financial Reporting Directive, and
- The EU and Member States, when setting public measures, standards or labels for green financial products or green (corporate) bonds.
Financial market participants will be required to complete their first set of disclosures against the Taxonomy, covering activities that substantially contribute to climate change mitigation and/or adaptation by the 31st of December 2021. Large companies will be required to disclose in the course of 2022. The technical screening criteria will be issued as part of the explicit legal requirements from the European Commission by the end of 2020.