Climate-responsible finance and the European Union’s taxonomy

IM Report Olivia Lê Horovitz · November 22, 2021

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Enacted on July 12, 2020, the EU Regulation 2020/852, known as the Taxonomy Regulation, attempts to redirect capital flow and investments towards more “sustainable” activities, while requiring more transparency from certain companies.

It is applicable to the following companies, with more than 500 employees over the financial year and a balance sheet of more than 20M euros or a net turnover of more than 40M euros, subject to non-financial reporting obligations:

• listed companies
• banks
• insurance companies
• public-interest entities

The purpose of the regulation is to provide investors with consistent information based on objective criteria to assess whether a company’s activity has a positive impact on the climate.

According to the regulation, for an activity to qualify as environmentally “sustainable” it must:

• Contribute substantially to at least one of the six environmental objectives set out in Article 9: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems;
• Not cause significant harm to any of the other environmental objectives.
• Be carried out in compliance with social and fundamental rights safeguards, such as human rights.
• Follow the technical review criteria established by the European Commission.

The European Commission still needed to specify the technical review criteria. The Commission partly done this through the Delegated Act of June 4, 2021.

The EU Taxonomy Climate Delegated Act of June 4, 2021

The Delegated Act adopted on June 4, 2021 sets out a series of technical screening criteria to identify whether an economic activity contributes substantially to the first two environmental objectives: climate change mitigation and adaptation.

The two annexes to this Delegated Act contain the main developments in this respect with the details of the criteria to be taken into account to assess its compliance with one of the two objectives. The annexes were developed based on the recommendations of the Technical Expert Groups final report on March 9, 2020.

Some of the activities covered include forestry, bioenergy, and transportation. However, other activities were purposely excluded, including the agricultural sector (the reason given is the ongoing negotiations on the CAP), and also natural gas and nuclear power, whose sustainability is still the subject of heated debate.

The technical criteria will then be translated into quantitative indicators of economic performance that companies must publish in accordance with Article 8 of the regulation. Given the relative complexity of these new reporting obligations, it is in the interest of targeted companies to prepare their compliance strategy in advance. The Delegated Act is also intended to evolve over time and certain activities may be added or removed from its scope.

For more information

Under Article 8 of the Taxonomy Regulation, a second Delegated Act on sustainability indicators that non-financial undertakings must disclose was adopted on July 6, 2021.

This Delegated Act is crucial for two main reasons. On the one hand, it sets out the calculation methods, content and presentation of the indicators for companies. On the other hand, it offers investors a reliable comparison tool to differentiate between companies. The regulation will be applicable from January 2022 based on the 2021 financial year for the first two environmental objectives, and from January 2023 on the basis of the 2022 financial year for the other four environmental objectives.

Initially, reporting requirements will be light before a complete implementation of reporting measures will take place on January 1, 2024.

Conclusion

European taxonomy will be the focus of the European Commission’s work for the upcoming year. A Delegated Act defining the technical criteria for the other four environmental objectives is currently being drafted.

We are still awaiting the final version of the Ecolabel (European ecological label) for financial products which should allow retails investors concerned about the environmental impact of their investments to be more effectively informed.