On 18 June 2020, the European Parliament adopted the regulation on the establishment of a framework to facilitate sustainable investment[1] (the Taxonomy Regulation), a milestone in the EU’s Action Plan on Sustainable Finance (the Action Plan). It has since been published in the Official Journal and entered into force on 12 July 2020. The EU-wide green taxonomy set out by the Taxonomy Regulation represents one pillar of the regulatory proposals under the Action Plan and is due to be implemented in stages, commencing from 10 March 2021. As businesses and financial market participants begin preparing for the implementation of the Taxonomy Regulation, we take a closer look at its scope and operation.
Context
The European Commission launched the Action Plan on Financing Sustainable Growth (Action Plan) in March 2018, following recommendations from the High-Level Expert Group on Sustainable Finance. The Action Plan’s stated objectives are to (i) reorient capital flows towards sustainable investment, (ii) manage the financial risks arising from climate change, environmental degradation and social issues, and (iii) foster transparency and long-termism in financial and economic activity.[1] The key legislative proposals emerging from the Action Plan include the Disclosures Regulation[2] and amendments to the EU Benchmark Regulation.[3] Other legislative proposals emerging out of the EU include amendments to the Non-Financial Reporting Directive (NFRD) and the Shareholder Rights Directive. These regulatory proposals have received further impetus from the EU’s Green Deal which was presented by the European Commission in December 2019 as the roadmap to its “just and inclusive transition” to a sustainable and climate-neutral economy.
A possible outcome of the COVID-19 pandemic is a dilution of the emphasis on the EU’s “ESG-roadmap”. However, indications are that sustainability will feature heavily in the recovery from the pandemic and our observations are that a broad range of market participants are still focused on their ESG-related agendas. The European Commission has launched a number of consultations earlier this year directed at implementing the Action Plan and European Green Deal. The Commission also recently emphasised the significance of the COVID-19 crisis in highlighting “the subtle links and risks associated with human activity, climate change, and biodiversity loss, as well as the subsequently critical need to strengthen the sustainability and resilience of our societies and economies”,[4] and has attached “green strings” to the proposed €750 billion post-pandemic recovery plan and updated seven-year €1 trillion budget, confirming that any spending will be subject to the Taxonomy Regulation’s “do no harm” principle.[5]
A key component of the Action Plan, and the focus of this article, is the development of an EU-wide green taxonomy on environmentally sustainable activities (the Taxonomy) which is intended to provide a common language for the regulatory proposals under the Action Plan. On 18 June 2020, the European Parliament adopted the text of the Taxonomy Regulation which will form the legal basis for this Taxonomy. This endorsement comes after two years of political negotiation and consultation, including the publication of recommendations by the European Commission’s Technical Expert Group on Sustainable Finance in March 2020 (the TEG Recommendations).
Once the Taxonomy Regulation enters into force in December 2021, it will establish the criteria for determining whether an economic activity qualifies as environmentally sustainable for the purposes of determining the degree to which an investment is environmentally sustainable. The Taxonomy Regulation introduces new disclosure obligations on financial market participants (such as asset managers), supplementing the obligations under the Disclosures Regulation that are expected to apply from March 2021. The Taxonomy Regulation also introduces new disclosure obligations for some corporates, supplementing the disclosure obligations under the Non-Financial Reporting Directive. These disclosures are intended to enable asset owners, asset managers and investors to make “like-for-like” comparisons between financial products and investee companies; the theory being that this will tackle one of the most significant obstacles in the ESG markets today (see our earlier blog). The Taxonomy Regulation will be supplemented by delegated acts containing technical screening criteria, drafts of which are expected to be published in stages. The technical screening criteria will be informed by the TEG Recommendations, although there may be some points of difference.
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Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.