eu taxonomy explained

The SFDR (as supplemented by the Taxonomy) requires investment firms to disclose: Depending on the rule in question, the relevant SFDR disclosure will appear in one or more of the following locations: on the investment firm’s website, in periodic reports, in promotional material, and/or in pre-contractual documentation. This section sets out the role and importance of sustainable finance in Europe from a policy and investment perspective, the rationale for the development of an EU Taxonomy, the daft regulation and the mandate of the TEG. The proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9; The proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9. Returning to the core Article 3 Economic activities, they must meet the four conditions set out in the following Article 3 sub-sections: Classifying “environmental sustainability” in accordance with the Article 9 objectives, as further specified in delegated legislation made pursuant to Articles 10-15 and 19, is largely uncontroversial, as is the requirement to ensure no significant harm is caused to the other environmental objectives (per Article 17). The Taxonomy is based legally on a political agreement reached on December 17, 2019. London, England Almost all students start by learning the classification system – Kingdom, Phylum, Class, Order, Family, Genus, Species. The EU Green Deal is the Von der Leyen Commission’s program to make Europe’s economy more sustainable. Whilst the fate of the Taxonomy Regulation hung in the balance, there was still a genuine chance that the ESG regime might wilt on the vine before it had the chance to blossom, especially with Member States publicly challenging the position of their peers on matters ranging from forestry to nuclear power. The report contains recommendations relating to the overarching design of the EU Taxonomy, as well as extensive implementation guidance on how companies and financial institutions can use and disclose against the taxonomy. Together these new EU measures will have an impact far beyond the geographical boundary of the EU, shaping the flow of investments, the broader financial regulatory arena, and the working practices of many financial professionals. The taxonomy is the EU’s antidote to greenwashing. The detailed joint statement outlines and analyses ten priority areas of concern in the European Commission’s draft. The EU Taxonomy Regulation: An Overview Introduction. He is responsible for research, strategy, advisory services, product design, and thought leadership. The EU Taxonomy is a tool to help investors, companies, issuers and project promoters plan and report the transition to an economy that is consistent with the EU’s environmental objectives. Moreover, the Taxonomy applies directly to Member States, who are prohibited from introducing domestic rules that would compromise the integrity of the Taxonomy regime. The SFDR rules are further broken down into mandatory and “comply or explain” rules, as well as entity- and product-level rules. However, with the publication of the Taxonomy Regulation, the theoretical timelines from a few weeks ago have now crystallized into hard compliance deadlines. This site uses Akismet to reduce spam. Closely involved in its creation, Eila Kreivi, head of capital markets at the European Investment Bank, compares the taxonomy to a second language. Asia Pacific Headquarters The activity must also have a substantial positive environmental impact based on the “lifecycle considerations.”. Struggling with the question of “what is a taxonomy” as it applies to your WordPress site? (update June 19, 2020 : The text was adopted by the Council on June 10, 2020 , and endorsed by the European Parliament on June 18, 2020). Actually, the TEG’s mandate was only to consider the four environmental objectives (pollution prevention and control, use and protection of water and marine resources, circular economy, and protection and restoration of biodiversity and ecosystems) in the context of avoiding significant harm. An EU Taxonomy is indispensable in making the EU climate targets implementable in practice. Hence, we are likely to utilize the EU Taxonomy on Sustainable Activities and the EU Green Bond Taxonomy in the short term for this purpose. Speaking at a press conference, Viñes Fiestas explained how the EU’s taxonomy works as a tool to guide investments in the transition. He spent the following 15 years working for several of the world’s leading investment banks across Europe and in the U.S before joining FactSet. The EU Parliament has already formulated its position on the legislative proposal with respect to Taxonomy, and the next step will be to reach an agreement with the Commission and the Council. The principles of EU Taxonomy The Taxonomy is based legally on a political agreement reached on December 17, 2019. The review of the Non-Financial Reporting Directive, By 1 June, 2021, the European Commission will adopt a delegated act specifying. By following the recommendations of the IIF to pool their efforts, they also started a race to create the premiere transnational ESG framework, in a potentially zero-sum “winner takes all” bid to become the principal international ESG standard and one of the most important and impactful rulesets on the planet. International Headquarters Impact-Cubed’s research advisor Antti Savilaakso explained: “The European Commission intends for the EU taxonomy regulation to facilitate capital flows to environmentally sustainable economic activities, but also to curb investment product greenwashing via regulated disclosures.” Once an investment firm has procured the necessary data, undertaken the relevant analysis, and finally classified the “environmentally sustainable” nature of an investment, what happens next? Read part 1 of this 2-part series about sustainable finance, or continue... Introduction. At present, there is a gap between the data disclosed pursuant to the NFRD and the data required by the SFDR and Taxonomy Regulation. Taxonomies are an important part of categorizing your WordPress site’s content, but the term often confuses beginners because “taxonomy” isn’t something most of us hear in daily life. To achieve the goals of the EU Green Deal, climate neutrality, sustainable economic growth and inclusion of all countries, a classification system for sustainable activities fulfils a … Martindale also explained that low taxonomy alignment of a green portfolio does not necessarily mean that a case of greenwashing, according to EU standards, exists. A unified taxonomy and the monitoring of sustainab ility of investments will support the uptake of sustainable finance in the European financial sector. (0)20.3009.7000, Asia Pacific In contrast to the position in the U.S., the EU is adopting standardized definitions through its recently published Taxonomy Regulation. The EU Taxonomy is a classification system of environmentally sustainable activities. If I was to synthesize what the taxonomy is all about, I’d say that: Companies will report their sustainability metrics in much more detail to let investment managers make informed decisions. Each objective is explained further in the Taxonomy Regulation and linked to any existing EU law on that area. +1.203.810.1000, Europe, Middle East & Africa PART A Explanation of the Taxonomy approach. Despite the ongoing rise in ESG investments and attention given to the topic, investors are still plagued by several challenges. Article 3: Environmentally Sustainable Economic Activities. These measures include a suite of prudential rules, proposals for labeling sustainable investments such as EU Green Bond Standard (“EU-GBS”) and a Financial Services Ecolabel, ESG corporate engagement rules (under the Shareholder Rights Directive II), and requirements for the development and maintenance of climate benchmarks (under the Climate Benchmark Regulation). ESG Considerations in the Insurance Space. Contribute substantially to one or more of the environmental objectives (in Article 9); Not significantly harm any other Article 9 objective (in accordance with Article 17); Be carried out in compliance with minimum safeguards (laid down in Article 18); Comply with technical screening criteria (established under Articles 10-15 and 19). It provides tools to ... are a combination of a narrative explanation and proportion of underlying investments that are taxonomy-aligned expressed as a percentage Once these steps have been taken, investment firms will then need to identify if they have the resources, data, systems, personnel, and subject matter expertise to meet the requirements. Both the Taxonomy Regulation and the SFDR have enormous scope and application, covering more or less the entire asset management industry and beyond. Once their needs are identified, they will have to reach out to senior management, their finance department, and project managers to agree and scope out the project. In terms of the latter, the SFDR distinguishes between genuinely “sustainable investments” (Article 9 of the SFDR) and investments that merely promote the ESG characteristics of an investment (Article 8 of the SFDR). Unconstrained by the EU legislative process, they may succeed in winning the race. The Taxonomy Regulation introduces a sustainability classification system through which investment firms must classify investments based on NFRD data (and other datasets). The  tricky relationship between these two principles has not been lost on the European Supervisory Authorities, who, in their April 23, 2020, Joint Committee Consultation Paper on SFDR delegated legislation, discuss the consequences of having these two similar yet separate principles intersecting, together with a litany of other discontinuities and difficulties that arise between the Taxonomy and the SFDR texts. This is not the only quirk of Article 18 either, which is also notable for requiring the entity under evaluation to comply with the “do no significant harm” (DNSH) principle in Article 2(17) of the SFDR, which in itself is uncontentious, but does draw attention to the “link” (or lack thereof) between the SFDR DNSH principle in Article 2(17) of the SFDR and the similar principle in Article 17 of the Taxonomy Regulation, which applies to the Article 9 Environmental Objectives. EU Taxonomy: 130 organisations call for science-based green finance rules Reclaim Finance and 129 NGOs and experts urge the European Commission to root the EU’s ‘sustainable’ Taxonomy in science. Companies that perform activities not yet covered by the Taxonomy could complement their Taxonomy-alignment disclosure with an explanation that the results reflect the fact that their activities are not yet covered by the Taxonomy – as opposed to them being unable to meet technical screening criteria. Moreover, its formal legitimacy, compared with the voluntary nature of other regimes, is likely to draw “appetite” from investors outside of the EU who are seeking reassurance (including from their clients) that their investments are genuinely sustainable rather than greenwashed. As such, it was decided that a broader ESG taxonomy would be hammered out after the environmental system went live. In short, the EU Taxonomy may well pose an existential threat to existing voluntary schemes, creating a new ESG world order. FactSet Hong Kong Limited Mr. Barrie Ingman is a member of FactSet’s Regulatory Solutions Group. Such a peculiar naming convention is not uncommon within the EU however, as the “European Markets Infrastructure Regulation” (EMIR) attests (with its official title being “Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories”). Above all, this system should help companies to raise finance for sustainable activities, by encouraging them to publish the percentage of their turnover or investments that is in line with the “green list” of environmentally sustainable activities. It is due to be disbanded in September. As summarized in the article FactSet published in April entitled “ESG Regulation - Where to Start,” and as further explained in FactSet's E.U. Article 3 activities are those that “substantially contribute” to one or more of the following six Article 9 “Environmental Objectives”: These Article 9 objectives are further defined in Articles 10 to 15 and in pending delegated legislation that will specify “Technical Screening Criteria” for each objective. Under the EU taxonomy regulation, large listed issuers have to report on the proportion of their turnover, capital expenditure and operating expenditure related to activities deemed environmentally sustainable under the EU taxonomy framework. For example, companies that are not required to publish non-financial statements, like SMEs, may decide to publish information on their website regarding their alignment with the Taxonomy Regulation. Nevertheless, just over a week before the Taxonomy Regulation was made law, on June 10, 2020, the Institute of International Finance (IIF) proposed that the main voluntary reporting frameworks should be consolidated into a single global framework, which, though unsaid in the piece, would provide direct competition to the EU taxonomy as the de facto global ESG regulatory framework. The firm needs to feed the analysis into the SFDR disclosures by way of Articles 5 and 6 of the Taxonomy Regulation, which is the principal mechanism through which the regulation makes its presence felt in the world: In many respects, the Taxonomy can be regarded as a very elaborate set of marketing rules. Whether they are intentional or accidental, if ESG factors are ignored they can have an outsized impact on a general account at... Americas Specifically, Article 8 requires entities subject to the NFRD to disclose in their non-financial statements “information on how and to what extent their activities are associated with environmentally sustainable economic activities under Articles 3 and 9 of the [Taxonomy Regulation]” including: The European Commission is required to adopt a Delegated Act by June 1, 2021, specifying the content and presentation of the information to be disclosed and the methodology used, taking into account the specificities of both financial and non-financial undertakings and the technical screening criteria established under the Taxonomy Regulation. ESG Regulations Guide, the EU ESG regulatory regime is comprised of several disparate measures, nearly all of which intersect with the Taxonomy in some way. Meanwhile, Article 7 of the Taxonomy Regulation applies the following boilerplate pre-contractual and periodic reporting disclosure to all otherwise in-scope financial products that are not “sustainable investments” and that do not promote their ESG characteristics (in accordance with Articles 8 and 9 of the SFDR, respectively): “The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.”. Articles 5 of the Taxonomy Regulation interfaces with Article 9 of the SFDR and adds taxonomy-specific pre-contractual and periodic reporting disclosures. In addition, a “Member State Expert Group” will contribute in an advisory capacity. In its draft proposal, the Commission explained that views differed as to the level of detail an EU taxonomy should have, an issue widely discussed among investors and asset managers before and after the action plan was launched. In short, these bodies signaled that they saw the existential threat to their operations posed by the Taxonomy Regulation and were determined to meet it head on. NB : Two linked posts  : “It must be green ! Learn how your comment data is processed. The expected EU added value of the proposal lies in its potential to enable the mobilisation of sustainable finance across the EU, while ensuring a high level of financial stability. Hong Kong He has won numerous academic and professional awards including most recently the 2018 Lombard Prize for best post-graduate thesis on finance in the UK, presented by the Worshipful Company of International Bankers. It is arguable that these rules already exist within the EU acquis in some form or other, whether through express legislation or implicitly in fundamental EU constitutional principles such as those found in the Treaty on the Functioning of the EU (TFEU). The EU Taxonomy holds that an economic activity makes a substantial contribution to adaptation objectives if: (i) all material physical climate risks identified for the economic activity are reduced to the extent possible and on a best effort basis; and/or (ii) it reduces material physical climate risk in other economic activities. Moreover, the European Commission Consultation launched in February 2020 (accompanied by a Background Document) proposes to expand the application of the Directive and reconcile the disclosure requirements of the NFDR with the reporting requirements of the SFDR and Taxonomy. Provide clarity on what it takes, within specific industries, to achieve the commitments made under … In order to reach the goals of climate neutrality, sustainable economic growth, and inclusion of all countries, a classification system … This contains an explanation of the taxonomy approach, methodologies, user and case analysis, economic impacts of the taxonomy, and a full list of screening criteria. The EU Sustainable Finance Technical Expert Group’s (TEG) March 2020 Final Report and Annex sets out detailed proposals for the first tranche of delegated legislation, covering the first two objectives, which must be published by December 31, 2020. A Simple Framework for Selecting and Integrating ESG Data. Officially called “Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088,” nowhere is the term “taxonomy” used. understand how their investments align with the EU taxonomy. European Union: EU Sustainable Finance Explained – Taxonomy Part II – Key Taxonomy-related takeaways. After the publication of this final report, the TEG will continue to operate in an advisory capacity until the new Platform on Sustainable Finance – a permanent body set up under the Taxonomy Regulation – is operational. Moreover, given that the rules only apply when seeking to establish whether an investment is “environmentally sustainable,” their impact is relatively modest. At the core of the Taxonomy is Article 3, which, in conjunction with several other articles, identifies the following categories of “economic activities”: The first set of activities—the “principal” Environmentally Sustainable activities—are the core of the regime, while Transition and Enabling activities are classes that facilitate the transition to a sustainable economy that the Regulation is designed to facilitate. Article 10(2) “transition activities” are activities for which there are no technologically and economically feasible low-carbon alternatives and which support the transition to a climate-neutral economy in a manner that is consistent with “a pathway to limit the temperature increase to 1.5 ⁰C above pre-industrial levels.” Transition activities only relate to Article 9 “Climate Change Mitigation” Environmental Objective (as further explained in Article 10). Global Headquarters This could help raise finance for the relevant investments. The Taxonomy Regulation also introduces new disclosures for corporates subject to the NFRD. A full evaluation of economic activities that can substantially contribute to one or more of these four objectives will be completed by this yet to be established “Platform on Sustainable Finance”. The logic behind this claim is that the profusion of overlapping voluntary standards has produced a fragmented landscape that inhibits meaningful comparison between investments, thereby discouraging additional sustainable investments. The Taxonomy is one of these, and is linked to the other actions that the EU TEG has been working with. Similarly, a few weeks later, the U.S. Department of Labor went further, proposing a rule that would legally oblige fiduciaries to focus on returns over ESG considerations in a measure that, if adopted, would collide head-on with consensus (but not universal) jurisprudence that consideration of ESG factors is also a fundamental obligation of a fiduciary. As discussed above, the SFDR has three main types of disclosures: those relating to the risks presented by an investment to ESG factors and vice versa (the so-called “double materiality” perspective), and those relating to how an investment is marketed. And for the first time, criteria for climate adaptation have been included, covering 70 economic activities, relying on a risk assessment and a plan to address the risks. Social and governance factors also feature in the new Taxonomy Regulation, but only as a component (rather than as a principal focus) of the regime, which is dedicated to environmental considerations. +852.3710.6100, Support Mr. Ingman is a qualified barrister and solicitor, graduating with distinction from law school, business school (MBA), and university earning an LLM in Law and Finance from Kings College, London. FactSet Research Systems Inc. The EU Taxonomy for sustainable activities is a new uniform language that helps to distinguish which investments contribute to the European environmental objectives Large public-interest companies with over 500 employees are required to report which part of their turnover and expenditure is in line with the Taxonomy Further, less  than 10 days later, on June 19, 2020—the day after the announcement that the Taxonomy had been signed into law—Responsible Investor cited in its Daily Briefing that the Climate Disclosure Standards Board, Sustainability Accounting Standards Board, Global Reporting Initiative, and CDP (formerly the Carbon Disclosure Project), had declared that they were working together to provide a “globally harmonized system” that “delivers on the pillars set out by the TCFD…across all sustainability targets,” whilst also inviting the International Financial Reporting Standards Foundation to join them. Updated technical screening criteria for 70 climate change mitigation and 68 climate change adaptation activities, including criteria f… The report is supplemented by a technical annex containing a full list of revised or additional technical screening criteria for economic activities which can substantially contribute to climate change mitigation or adaptation. The report is supplemented by a technical annexcontaining: 1. Nevertheless, earlier in the year, one of the two largest credit rating agencies noted that “a lack of standardization of definitions and processes” was impeding the growth of the ESG sector. The reason for this is that the EU wanted to get the environmental classification system up and running in time to meet approaching Paris Climate Agreement deadlines. The European Commission will develop delegated acts to further specify elements of this regulation in three phases: After taking into consideration a second round of feedback, which took place in summer 2019, the TEG published today its final report on EU taxonomy. Specifically, since the broader regime rested to a significant degree on the enactment of the Taxonomy Regulation, which at times looked unlikely to occur, many stakeholders began to question whether the regime would ever “make it over the line,” especially given what appeared at the time to be intractable problems relating to how to classify nuclear power and natural gas from a sustainability perspective, among other issues. He pointed out that currently the role of ‘neutral’ activities, ie activities that neither significantly harm nor contribute to ESG objectives, are not covered by the taxonomy. Norwalk, CT “Do No Significant Harm” criteria have also been added for climate change mitigation. This lack of standardization was raised by the asset management industry on May 24, 2020, in formal recommendations that called on the SEC to adopt regulation to address the problem. By providing asset owners with the data they need, it will unleash a flow of capital to sustainable investments. The TEG is a temporary body, whose duration has already been extended on numerous occasions. The most pressing ESG rules for investment firms, however, are those set out in the following three interlinked ESG texts: In summary, the Non-Financial Reporting Directive (NFRD) requires large EU “public interest” corporates (including many financial services firms) to publish data on the impact their activities have on ESG factors. TEG believes this is an important signal for companies to be able to send. Further granularity will be given in technical screening criteria, which will be built up over time and are to be updated on a regular basis to reflect the changing nature of the science and technology that underpin them. More specifically, this tool creates a standardised way of answering the question ‘How sustainable is this … Okay ?”  (Jan. 31, 2018) and The review of the Non-Financial Reporting Directive (Feb 22, 2020), Iconography : biface taxonomy showcase, Musée de l’Homme, Paris, personal collection, Your email address will not be published. PART B Methodology. Once it is fully developed, EU Taxonomy will have to be used by: Member States, the European Union, and the relevant market actors will have to start complying with these requirements from December 2021. It sets performance thresholds (referred to as ‘technical screening criteria’) for economic activities which: For technical screening criteria, the text requires to take into account the nature and the scale of the economic activity to possibly include “enabling” and “transitional” activities, and to take into account the potential market impact (risk of certain assets becoming “stranded”or risk of bubbles on “sustainable” investments). Investment firms face the challenge of determining which sources of ESG information best align with their investment approach and... Three Reasons Why Fixed-Income Investors Rely on ESG Factors. Required fields are marked *. With the first legal, pan-regional framework, the EU will have first-mover advantage and may potentially obtain important network effects that could serve as barriers to entry to the “ESG standards business” in the future. The EU taxonomy is a tool to help investors understand whether an economic activity is environmentally sustainable, and to navigate the transition to a low-carbon economy. Since it will have the force of law and since no other legal frameworks are being developed to compete with it, the EU framework will become the de facto global ESG (gold) standard. Finance theme group webinar: ”EU’s Taxonomy Regulation Explained” 19.05.2020 @ 14:00 - 15:00 « CLC Advisory board webinar: Green Deal and CLC’s systemic model -current status and key avtions 2020 However, on June 18, 2020, the presidents of the European Council and Parliament announced that they had signed the EU Taxonomy Regulation into law, which was published in the EU’s Official Journal just four days later, heralding a new era of financial regulation. What does the proposed EU Taxonomy mean? 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