Sustainable Finance: The EU Taxonomy at a Glance
The EU Taxonomy is a tool to help large firms (including financial market participants and financial advisors) measure the environmental sustainability of economic activity in the context of a low carbon, resilient and resource-efficient economy. This Taxonomy is one of the results of the EU Action plan on Financing Sustainable Growth (released in March 2018).
As presented during our webinars on the 3rd and 24th of September 2020, the EU Taxonomy measures the performance from four different angles:
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:
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.
More information and details on the EU Regulatory Developments will follow in our next Synechron “Knowledge Bytes” blog post.
Until then, if you would like to know more, please contact our Sustainable Finance expert team:
Rajul Mittal, Head of Sustainable Finance, Amsterdam