Measuring against Sustainability targets

We are seeing governments, businesses and investors making commitments toward net zero. The EU Taxonomy is a significant development because it’s the first serious effort by regulators not to address financial risk measures, but against a sustainability target. It does so by enabling companies and issuers to access financing for economic activities and sectors that are consistent with the EU’s commitment to the Paris Climate Agreement to be carbon neutral by 2050.

Note: The latest Technical Expert Group (TEG) report of 500+ pages, explains extensively the Taxonomy framework, which goes beyond the financial services sector.

Disclose, disclose, disclose

Once the performance has been calculated for a company or for an investment or an economic activity then this new data is required to be disclosed. This starts from March 2021 (SFDR)) with further disclosure requirements by 31st December 2022.

The outcome of this is that for financial market participants per financial product category, different disclosure requirements apply, as defined in the Regulation on Sustainability-Related Disclosures in the Financial Services. On the other hand, companies that need to comply with disclosure requirements under the Non-Financial Reporting Directive (NFRD) must make disclosures with reference to the Taxonomy.

Furthermore, other parts of the Taxonomy will be clarified in delegated acts as per this schedule:

• End of 2020: Adoption of the first technical screening criteria, for activities which substantially contribute to climate change mitigation or adaptation
• June 2021: Adoption of delegated act by the European Commission on how the corporate disclosure obligations are to be applied in practice, including the differences between non-financial and financial companies
• End of 2021: Enter into application of the first technical criteria. Also, by this time to be adopted are the second set of technical screening criteria, which cover economic activities substantially contributing to the other four environmental objectives,
• End of 2022 : Enter into application of the second set of technical screening criteria

Defining the current and future standards

The EU is, at the moment, ahead of the curve with the design of the EU taxonomy. Furthermore, the International platform on Sustainable Finance (IPSF) is an initiative to ensure the Taxonomy is appropriately built out even more. The EU realizes that international cooperation and coordination for the capital markets is necessary. Initiatives such as taxonomies, disclosures, standards and labels need to be aligned globally to eventually make that happen.

But will the EU set the standard? As the EU is one of the few with binding requirements it means that firms will have to start working on this now. All EU stakeholders need to cooperate and get aligned quickly on different Sustainable Finance topics. One can state that by starting earlier and gaining more experience over time the EU might partially be the leader in this area, even if sparked by trial and error.