Taxonomy Regulation

Background

The EU Taxonomy Regulation (2020/852) was published in the Official Journal in June 2020, and is a classification system that will be used to determine which economic activities can be considered ‘sustainable’.

Overview

The Taxonomy is a list of activities along with specific performance criteria with regards to their contribution to the six environmental objectives, as set out by the European Commission’s Technical Expert Group (TEG) on sustainable finance. It will create a common language for financial institutions, investors, and policy makers, with an initial focus around environmental sustainability. The TEG published its final report on the EU Taxonomy in March 2020, which includes recommendations on the design of the taxonomy as well as implementation guidance.

Key EU Environmental Aims & Objectives

In order for an activity (not a firm or asset) to be deemed environmentally sustainable, it must:

– contribute to a minimum of one of the following objectives, and cause no harm to the other five objectives
I. Climate change mitigation
II. Climate change adaptation
III. Sustainable use and protection of water and marine resources
IV. Transition to a circular economy, waste prevention and recycling
V. Pollution prevention and control
VI. Protection of healthy ecosystems

– comply with minimum ‘social’ safeguards i.e. prevent adverse social impacts

– comply with technical screening criteria (Article 19 – Requirements for technical screening criteria), which are currently under development by the Commission and will be released via delegated acts

In addition, Article 20 requires the Commission to ‘establish a Platform on Sustainable Finance’ made up of industry experts to advise on the technical screening criteria.

The core aim of the Taxonomy is to “provide clarity and transparency on environmental sustainability to investors, financial institutions, companies and issuers thereby, enabling informed decision-making, in order to foster investments in environmentally sustainable activities” (Spotlight on Taxonomy).

Scope

The Taxonomy Regulation impacts financial market participants as defined in (EU) 2019/2088 (SFDR), including Alternative Investment Funds (AIFs), Undertakings for the Collective Investment in Transferable Securities (UCITS), investment firms, and credit institutions offering portfolio management services.

When will this apply?

The Taxonomy Regulation entered into force on 12 July 2020.

Activities that contribute to climate change mitigation and adaptation will apply from January 2022.

Activities that contribute to the remaining four environmental objectives will apply from January 2023.