EU Taxonomy - reminder on who, what and when

Following the political agreement  last December between the European Parliament and the Council, the Regulation on “the establishment of a framework to facilitate sustainable investment”, the so-called Taxonomy Regulation, has at last been approved after long negotiations. It is now ready to be enshrined in hard law (in a “Regulation”, i.e. most binding legislative act in EU Law).

1. Members States and the EU will be required to apply the Taxonomy when adopting measures (e.g. labels or standards) setting requirements regarding financial products or corporate bonds presented as ‘environmentally sustainable’.
    
2. The Regulation also applies to financial market participants (e.g. institutional investors and asset managers) who offer financial products. It is a quite large remit that goes beyond ESG/Green products to include mainstream products. They will be required to disclose information on how and to what extent the investments that underlie their financial product support economic activities that meet the criteria of the Taxonomy (including details on the respective proportions of enabling and transition activities). Furthermore, for those products that do not invest in taxonomy-compliant activities, a statement will need to be made saying that the relevant investments do not take into account the EU Taxonomy Regulation. In our view, such explicit requirement is bold and prescriptive (strong “comply or explain” obligation).
    
3. Issuers will be expected to disclose their share of turnover, CAPEX & OPEX taxonomy compliant under the Non-Financial Reporting Directive (NFRD), which applies to roughly 6,000 large companies and groups across the EU.
    
4. The three categories of activities – already low-carbon, enabling and transitional - are maintained as well as the “do no significantly harm” criteria. Social minimum safeguards are included and refer to OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, and ILO core conventions.
    
5. Reminder: the technical screening criteria (activity by activity metrics and thresholds) are not included in the Regulation. They will be incorporated in delegated acts adopted by the Commission (with the assistance of the TEG & “Platform on Sustainable Finance”, see infra). The Revised report and final recommendations from the TEG have been published on March 9. 
    
6. The technical screening criteria are meant to be consistent with a pathway to limit the temperature increase to 1.5°C. They will remain binary (i.e. non-shaded Taxonomy, despite the willingness of the European Parliament to introduce shades, incl. brown ones).
    
7. The word “nuclear” is absent from the text, one must read between the lines. The decision to include or exclude nuclear energy has been left to the detailed rules based on technical expert input, subject to ‘do no significant harm criteria' (disposal of waste, life-cycle considerations). Solid fossil fuels (i.e. coal) are explicitly excluded.
    
8. Timeline: Climate change mitigation & adaptation criteria are to be adopted by end of 2020 and start applying by the end of 2021. Other environmental objectives (e.g. water and marine resources, circular economy, biodiversity) are to be adopted by the end of 2021 and start applying by the end of 2022.  Member States, the European Union, and the relevant market actors will have to start complying with the Taxonomy Regulation requirements from December 2021.
    
9. A multi-stakeholders Platform on Sustainable Finance (incl. European Environment Agency, European Supervisors, the EIB, and experts or representatives from financial and non-financial sectors, academia, civil society) will be created in 2020 to take on the role of the TEG, especially to monitor and further the Taxonomy (new activities). Criteria are to be reviewed at least every 3 years.  Whilst a Member States Expert Group is to be created, we observe a risk of “politization” and non-climate-science-based decisions or influence.