On 29 January 2020, the agreed text of the EU’s framework for classifying which activities are ‘green’ or ‘sustainable’ (the Taxonomy) was published and is expected to become law in the coming weeks.
What is the Taxonomy?
The Taxonomy sets down the key criteria against which the ‘sustainability’ of all economic activities will be measured. It is the foundation on which the EU’s Action Plan on sustainable finance is built; without which there is no EU harmonised understanding of what is, or is not, a sustainable investment. And without a harmonised definition of ‘sustainable investment’, the Action Plan’s core objective to ‘shift capital flows towards more sustainable activities’ cannot be achieved.
What is the impact of the Taxonomy?
To be ‘green’ an investment must be in an economic activity which contributes to one or more of the six environmental objectives1 under the Taxonomy.
The Taxomony details, in respect of each environmental objective, the types of contributing activities e.g. an activity may contribute to the objective of climate change mitigation if it contributes to stabilising the greenhouse gas concentrations in the atmosphere by reducing greenhouse gas emissions through an increase in clean or climate-neutral mobility.
In addition to contributing to one or more of the environmental objectives, it must also meet the Taxomony test for causing no significant harm to any of the remaining objectives, comply with the Taxonomy’s minimum safeguards and comply with the technical screening criteria for the relevant environmental objective(s).
While not diminishing the significance of its agreement, particularly from a political perspective, the Taxonomy is essentially the bones of the Action Plan and the technical screening criteria (TSC) the meat, as it is the latter which will lay down the criteria for assessing the sustainability of a specific economic activity. The TSC have yet to be agreed however, the Taxonomy does provide a timeframe for their publication. In relation to the climate change mitigation and adaptation objectives, the TSC must be published by 31 December 2020 and effective by 31 December 2021. The TSC for the remaining four objectives are due for publication by 31 December 2021 to be effective by 31 December 2022. The technical expert group advising the Commission on the TSC published an initial report in June 2019 containing TSC for 67 activities across eight sectors and it is scheduled to provide its final recommendations to the Commission in March 2020.
What obligations are imposed under the Taxonomy?
As discussed in our January briefing (First Concrete Steps Taken To Implement EU Sustainable Finance Action Plan) the Disclosures Regulation, which comes into effect on 10 March 2021, obliges a broad cross-section of EU regulated entities (including AIFMs and UCITS management companies (FMCs)) to make sustainability-related disclosures.
The Taxonomy amends and extends the obligations on entities within the scope of the Disclosures Regulation by requiring:
- FMCs which pursue sustainable investment objectives, to disclose the environmental objective(s) under the Taxonomy to which an investment contributes along with a description of the extent of such investment relative to the overall portfolio of investments;
- FMCs which promote environmental characteristics, to include a specific disclosure regarding the investments which take into account the environmental objectives listed in the Taxonomy and those which do not;
- all other FMCs, to state that “The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable investments”.
Specific details on the required presentation and content of the above disclosures will be set out in delegated legislation scheduled for publication in the course of 2021 and 2022.
What’s next for the Taxonomy?
The agreed text of the Taxonomy is expected to be published in the coming weeks and will enter into force 20 days after its publication in the Official Journal. The disclosure obligations will come into effect either on 31 December 2021 (in respect of disclosures relating to the climate change and adaptation environmental objectives) or 31 December 2022 (in respect of one or more of the remaining four environmental objectives).
1 The environmental objectives under the Taxonomy are; i) climate change mitigation; (ii) climate change adaptation; (iii) sustainable use and protection of water and marine resources; (iv) transition to a circular economy; (v) pollution prevention and control; and (vi) protection and restauration of biodiversity and ecosystems.