EU Taxonomy Regulation a Step Towards Achieving Sustainability Objectives
The EU will need 180 billion euros of private investments into sustainable business in order to meet the targets of the Paris climate agreement. In order to accelerate this development, the European Parliament and Council issued the Regulation on the establishment of a framework to facilitate sustainable investment, known as the Taxonomy Regulation, in the summer of 2020.
What is the Taxonomy Regulation?
The regulation makes it possible to offer financial products that pursue environmentally sustainable objectives and channel private investments into sustainable activities. In practice, the regulation is an amendment of the rules of the EU’s financial system that links financing to the EU’s climate goals.
The Taxonomy Regulation applies to, for example, Member States, listed companies employing over 500 people, financial market operators and insurance companies. The regulation encourages companies to make their businesses more environmentally sustainable.
What Kinds of Economic Activity are Considered Sustainable?
The regulation has six environmental objectives:
- climate change mitigation
- climate change adaptation
- the sustainable use and protection of water and marine resources
- the transition to a circular economy
- pollution prevention and control
- the protection and restoration of biodiversity and ecosystems.
The regulation will enter into force at the start of 2022 with respect to the climate change mitigation and adaptation objectives and on 1 January 2023 with respect to the other environmental objectives.
According to the regulation, economic activities are sustainable if they make a substantial contribution to one or more of these environmental objectives and do not significantly harm the objectives. The regulation specifies characteristics for each objective for determining when an economic activity is considered to cause significant harm to the objective. For example, an activity is considered to harm the objective of climate change mitigation if it leads to significant greenhouse gas emissions.
An economic activity also qualifies as contributing substantially to the environmental objectives if it directly enables other activities to make a substantial contribution to one or more of those objectives. In such cases, life-cycle considerations must also be taken into account.
An economic activity is considered environmentally sustainable when carried out in compliance with certain minimum safeguards. It must also comply with technical screening criteria that will be established by the Commission for each objective.
How Will the Regulation Impact Notification Obligations?
In addition to environmental objectives, the Taxonomy Regulation sets disclosure obligations on companies relating to, among other things, financial products, that are divided into three classes:
- environmentally sustainable investments
- financial products promoting environmental characteristics
- other financial products.
When offering environmentally sustainable investments or financial products promoting environmental characteristics, companies must disclose information on the environmental objectives to which the investment underlying the financial product contributes, as well as how and to what extent the investments underlying the financial product fund economic activities that are considered environmentally sustainable in accordance with the taxonomy. If a financial product does not fulfil the above criteria, the information disclosed on its must state that the financial product does not take the criteria for environmentally sustainable economic activities into account.
How Does the Regulation Benefit Investors
The Taxonomy Regulation unifies the definition of environmentally sustainable economic activity throughout the EU. A uniform classification enhances investor confidence and awareness of the environmental impact of financial products and addresses concerns about ‘greenwashing’. Greenwashing is the marketing of products as environmentally friendly despite the claimed environmental requirements not being met.
A uniform system also helps investors compare investment opportunities across borders.
Taxonomy and Green Financing Frameworks
In addition to disclosure obligations, the Taxonomy Regulation also sets a new type of pressure on companies to put environmentally sustainable activities directly into practice in activities that companies engage in through a green finance framework.
A green finance framework is designed to support the financing or refinancing sustainable development projects that comply with the framework. The allocation of funds and the environmental impacts of projects funded through a framework are reported annually.
Green financing frameworks and their quality must always be confirmed by an external assessment provider (such as CICERO Shades of Green).