TEG believes this is an important signal for companies to be able to send. Nevertheless, just over a week before the Taxonomy Regulation was made law, on June 10, 2020, the Institute of International Finance (IIF) proposed that the main voluntary reporting frameworks should be consolidated into a single global framework, which, though unsaid in the piece, would provide direct competition to the EU taxonomy as the de facto global ESG regulatory framework. The EU Taxonomy was developed by the Technical Expert Group on Sustainable Finance (TEG), which comprises 35 members and more than 100 advisors and observers from the financial markets, industry, science, and civil society. Contribute substantially to one or more of the environmental objectives (in Article 9); Not significantly harm any other Article 9 objective (in accordance with Article 17); Be carried out in compliance with minimum safeguards (laid down in Article 18); Comply with technical screening criteria (established under Articles 10-15 and 19). The review of the Non-Financial Reporting Directive, By 1 June, 2021, the European Commission will adopt a delegated act specifying. The EU Taxonomy Regulation: An Overview Introduction. If I was to synthesize what the taxonomy is all about, I’d say that: Companies will report their sustainability metrics in much more detail to let investment managers make informed decisions. As discussed above, the SFDR has three main types of disclosures: those relating to the risks presented by an investment to ESG factors and vice versa (the so-called “double materiality” perspective), and those relating to how an investment is marketed. This system will not necessarily replace companies’ existing sustainability policies. The EU Taxonomy is a tool to help investors, companies, issuers and project promoters plan and report the transition to an economy that is consistent with the EU’s environmental objectives. A full evaluation of economic activities that can substantially contribute to one or more of these four objectives will be completed by this yet to be established “Platform on Sustainable Finance”. He has won numerous academic and professional awards including most recently the 2018 Lombard Prize for best post-graduate thesis on finance in the UK, presented by the Worshipful Company of International Bankers. Articles 5 of the Taxonomy Regulation interfaces with Article 9 of the SFDR and adds taxonomy-specific pre-contractual and periodic reporting disclosures. The EU Taxonomy is a tool to help investors, companies, issuers and project promoters plan and report the transition to an economy that is consistent with the EU’s environmental objectives. Finance theme group webinar: ”EU’s Taxonomy Regulation Explained” 19.05.2020 @ 14:00 - 15:00 « CLC Advisory board webinar: Green Deal and CLC’s systemic model -current status and key avtions 2020 Article 3(c) social and governance “minimum safeguards” have, however, raised a few eyebrows. Rather, it will make it easier for companies with sustainability policies to raise funding for their projects, if they meet the criteria set out in the taxonomy. This year, the world’s third-largest asset manager by assets under management (AUM) and the world’s second-largest accounting firm by revenue predicted, respectively, that sustainable assets, already valued at over $30 trillion, would further grow as a proportion of global AUM, which would pass $100 trillion before year end. The Taxonomy Regulation introduces a sustainability classification system through which investment firms must classify investments based on NFRD data (and other datasets). The viability of the EU’s ESG regulatory regime had been in … It’s not “panic stations” yet, but it’s definitely “action stations” given that the first key deadlines under the new regime (specifically the SFDR) are set for March 10, 2021, less the eight months away. The EU Taxonomy is a classification system of environmentally sustainable activities. An EU Taxonomy is indispensable in making the EU climate targets implementable in practice. Specifically, since the broader regime rested to a significant degree on the enactment of the Taxonomy Regulation, which at times looked unlikely to occur, many stakeholders began to question whether the regime would ever “make it over the line,” especially given what appeared at the time to be intractable problems relating to how to classify nuclear power and natural gas from a sustainability perspective, among other issues. Articles 6 of the Taxonomy Regulation does the same for Article 8 of the SFDR. A Simple Framework for Selecting and Integrating ESG Data. He is responsible for research, strategy, advisory services, product design, and thought leadership. Meanwhile, Article 7 of the Taxonomy Regulation applies the following boilerplate pre-contractual and periodic reporting disclosure to all otherwise in-scope financial products that are not “sustainable investments” and that do not promote their ESG characteristics (in accordance with Articles 8 and 9 of the SFDR, respectively): “The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.”. Once these steps have been taken, investment firms will then need to identify if they have the resources, data, systems, personnel, and subject matter expertise to meet the requirements. PART B Methodology. Required fields are marked *. Impact-Cubed’s research advisor Antti Savilaakso explained: “The European Commission intends for the EU taxonomy regulation to facilitate capital flows to environmentally sustainable economic activities, but also to curb investment product greenwashing via regulated disclosures.” It is a classification system that enables categorization of economic activities/sectors that play key roles in climate change mitigation and adaptation. Both the Taxonomy Regulation and the SFDR have enormous scope and application, covering more or less the entire asset management industry and beyond. Under the EU taxonomy regulation, large listed issuers have to report on the proportion of their turnover, capital expenditure and operating expenditure related to activities deemed environmentally sustainable under the EU taxonomy framework. To achieve the goals of the EU Green Deal, climate neutrality, sustainable economic growth and inclusion of all countries, a classification system for sustainable activities fulfils a … Global Headquarters This contains an explanation of the taxonomy approach, methodologies, user and case analysis, economic impacts of the taxonomy, and a full list of screening criteria. In contrast to the position in the U.S., the EU is adopting standardized definitions through its recently published Taxonomy Regulation. The report is supplemented by a technical annexcontaining: 1. London, England It contains recommendations relating to the overarching design of the Taxonomy, as well as guidance on how companies and financial institutions can make disclosures using the taxonomy. However, as discussed further below, Article 8 of the Taxonomy bridges this gap to a degree. Updated technical screening criteria for 70 climate change mitigation and 68 climate change adaptation activities, including criteria f… The activity must also have a substantial positive environmental impact based on the “lifecycle considerations.”. The EU taxonomy is a tool to help investors understand whether an economic activity is environmentally sustainable, and to navigate the transition to a low-carbon economy. The detailed joint statement outlines and analyses ten priority areas of concern in the European Commission’s draft. The report is supplemented by a technical annex containing a full list of revised or additional technical screening criteria for economic activities which can substantially contribute to climate change mitigation or adaptation. Investment firms face the challenge of determining which sources of ESG information best align with their investment approach and... Three Reasons Why Fixed-Income Investors Rely on ESG Factors. The climate mitigation criteria for 72 economic activities have been updated / completed. These measures form part of a broader suite of ESG initiatives designed to channel funding to genuinely sustainable rather than greenwashed investments, thereby facilitating compliance with Paris Agreement climate targets and the EU’s commitment to adopt the United Nations (UNs) Sustainable Development Goals as set out in the UN’s 2030 Agenda for Sustainable Development. Investment firms, particularly investment managers and product manufacturers, now need to work out what data they need, how they will analyze it, and how they will report it. With the first legal, pan-regional framework, the EU will have first-mover advantage and may potentially obtain important network effects that could serve as barriers to entry to the “ESG standards business” in the future. And hey, students are great at this, give them a little mnemonic to help them remember it (King Phillip Came Over For Great Soup) and you can have them chanting the system in no time. Moreover, its formal legitimacy, compared with the voluntary nature of other regimes, is likely to draw “appetite” from investors outside of the EU who are seeking reassurance (including from their clients) that their investments are genuinely sustainable rather than greenwashed. We would like to note however, that we have several questions and concerns about the usability of the Taxonomy in its current form. The logic behind this claim is that the profusion of overlapping voluntary standards has produced a fragmented landscape that inhibits meaningful comparison between investments, thereby discouraging additional sustainable investments. And more importantly, what … Once an investment firm has procured the necessary data, undertaken the relevant analysis, and finally classified the “environmentally sustainable” nature of an investment, what happens next? However, SEC Chair Clayton dismissed the recommendations, arguing that conflation of ESG factors led to an analysis that was insufficiently precise to meaningfully inform investment decisions. Actually, the TEG’s mandate was only to consider the four environmental objectives (pollution prevention and control, use and protection of water and marine resources, circular economy, and protection and restoration of biodiversity and ecosystems) in the context of avoiding significant harm. Article 3: Environmentally Sustainable Economic Activities. Further, less  than 10 days later, on June 19, 2020—the day after the announcement that the Taxonomy had been signed into law—Responsible Investor cited in its Daily Briefing that the Climate Disclosure Standards Board, Sustainability Accounting Standards Board, Global Reporting Initiative, and CDP (formerly the Carbon Disclosure Project), had declared that they were working together to provide a “globally harmonized system” that “delivers on the pillars set out by the TCFD…across all sustainability targets,” whilst also inviting the International Financial Reporting Standards Foundation to join them. The introduction of the EU Taxonomy is getting closer and the impact will be significant. Hence, we are likely to utilize the EU Taxonomy on Sustainable Activities and the EU Green Bond Taxonomy in the short term for this purpose. Hong Kong The viability of the EU’s ESG regulatory regime had been in doubt up until very recently. Asia Pacific Headquarters This classification system can also be used on a voluntary basis by any other market actors, other than those captured by the Non-Financial Reporting Directive. Mr. Ingman started his career at the Treasury Solicitor’s Department defending Judicial Review applications made against the government, before joining the FCA, where he investigated and brought cases of market abuse. In addition, a “Member State Expert Group” will contribute in an advisory capacity. The resulting Directive will be implemented i… The European Commission will develop delegated acts to further specify elements of this regulation in three phases: After taking into consideration a second round of feedback, which took place in summer 2019, the TEG published today its final report on EU taxonomy. At present, there is a gap between the data disclosed pursuant to the NFRD and the data required by the SFDR and Taxonomy Regulation. The expected EU added value of the proposal lies in its potential to enable the mobilisation of sustainable finance across the EU, while ensuring a high level of financial stability. On 9 March 2020, the TEG published its final report on EU taxonomy. What does the proposed EU Taxonomy mean? Above all, this system should help companies to raise finance for sustainable activities, by encouraging them to publish the percentage of their turnover or investments that is in line with the “green list” of environmentally sustainable activities. In its draft proposal, the Commission explained that views differed as to the level of detail an EU taxonomy should have, an issue widely discussed among investors and asset managers before and after the action plan was launched. Investment managers will give their investors a complete overview of the impact generated by their investments. The proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9; The proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9. Nevertheless, earlier in the year, one of the two largest credit rating agencies noted that “a lack of standardization of definitions and processes” was impeding the growth of the ESG sector. +1.203.810.1000, Europe, Middle East & Africa Since it will have the force of law and since no other legal frameworks are being developed to compete with it, the EU framework will become the de facto global ESG (gold) standard. The TEG is a temporary body, whose duration has already been extended on numerous occasions. The Taxonomy is one of these, and is linked to the other actions that the EU TEG has been working with. It is due to be disbanded in September. The principles of EU Taxonomy The Taxonomy is based legally on a political agreement reached on December 17, 2019. This lack of standardization was raised by the asset management industry on May 24, 2020, in formal recommendations that called on the SEC to adopt regulation to address the problem. Such a peculiar naming convention is not uncommon within the EU however, as the “European Markets Infrastructure Regulation” (EMIR) attests (with its official title being “Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories”). Returning to the core Article 3 Economic activities, they must meet the four conditions set out in the following Article 3 sub-sections: Classifying “environmental sustainability” in accordance with the Article 9 objectives, as further specified in delegated legislation made pursuant to Articles 10-15 and 19, is largely uncontroversial, as is the requirement to ensure no significant harm is caused to the other environmental objectives (per Article 17). Helena Viñes Fiestas, global head of stewardship and policy at BNP Paribas Asset Management and a member of the TEG, said: “The Taxonomy is a game changer. It is also adopting standardized processes through its Sustainable Finance Disclosure Regulation (SFDR). This is not the only quirk of Article 18 either, which is also notable for requiring the entity under evaluation to comply with the “do no significant harm” (DNSH) principle in Article 2(17) of the SFDR, which in itself is uncontentious, but does draw attention to the “link” (or lack thereof) between the SFDR DNSH principle in Article 2(17) of the SFDR and the similar principle in Article 17 of the Taxonomy Regulation, which applies to the Article 9 Environmental Objectives. Mr. Barrie Ingman is a member of FactSet’s Regulatory Solutions Group. At the core of the Taxonomy is Article 3, which, in conjunction with several other articles, identifies the following categories of “economic activities”: The first set of activities—the “principal” Environmentally Sustainable activities—are the core of the regime, while Transition and Enabling activities are classes that facilitate the transition to a sustainable economy that the Regulation is designed to facilitate. The most pressing ESG rules for investment firms, however, are those set out in the following three interlinked ESG texts: In summary, the Non-Financial Reporting Directive (NFRD) requires large EU “public interest” corporates (including many financial services firms) to publish data on the impact their activities have on ESG factors. Save my name, email, and website in this browser for the next time I comment. In short, these bodies signaled that they saw the existential threat to their operations posed by the Taxonomy Regulation and were determined to meet it head on. He pointed out that currently the role of ‘neutral’ activities, ie activities that neither significantly harm nor contribute to ESG objectives, are not covered by the taxonomy. Mr. Ingman is a qualified barrister and solicitor, graduating with distinction from law school, business school (MBA), and university earning an LLM in Law and Finance from Kings College, London. European Union: EU Sustainable Finance Explained – Taxonomy Part II – Key Taxonomy-related takeaways. EU taxonomy: a material explanation. International Headquarters Similarly, a few weeks later, the U.S. Department of Labor went further, proposing a rule that would legally oblige fiduciaries to focus on returns over ESG considerations in a measure that, if adopted, would collide head-on with consensus (but not universal) jurisprudence that consideration of ESG factors is also a fundamental obligation of a fiduciary. The environmental sustainability of an investment and the provenance of any ESG claims made; The risks investments present to ESG factors; The risks ESG factors present to investments. These measures include a suite of prudential rules, proposals for labeling sustainable investments such as EU Green Bond Standard (“EU-GBS”) and a Financial Services Ecolabel, ESG corporate engagement rules (under the Shareholder Rights Directive II), and requirements for the development and maintenance of climate benchmarks (under the Climate Benchmark Regulation). ESG Regulations Guide, the EU ESG regulatory regime is comprised of several disparate measures, nearly all of which intersect with the Taxonomy in some way. As summarized in the article FactSet published in April entitled “ESG Regulation - Where to Start,” and as further explained in FactSet's E.U. Your email address will not be published. Nevertheless, introducing this enormous body of international rules “by the back door”  is somewhat extraordinary, if not unprecedented. It sets performance thresholds (referred to as ‘technical screening criteria’) for economic activities which: For technical screening criteria, the text requires to take into account the nature and the scale of the economic activity to possibly include “enabling” and “transitional” activities, and to take into account the potential market impact (risk of certain assets becoming “stranded”or risk of bubbles on “sustainable” investments). Specifically, Article 18 defines these safeguards as “procedures” that must be implemented by the entity under consideration and which must align with the following international rule sets: In terms of the final bullet, particular emphasis is placed on compliance with the International Labour Organization Declaration's Eight Fundamental Conventions, as set out therein. The EU Green Deal is the Von der Leyen Commission’s program to make Europe’s economy more sustainable. A unified taxonomy and the monitoring of sustainab ility of investments will support the uptake of sustainable finance in the European financial sector. Learn how your comment data is processed. More specifically, this tool creates a standardised way of answering the question ‘How sustainable is this … Despite the ongoing rise in ESG investments and attention given to the topic, investors are still plagued by several challenges. The SFDR rules are further broken down into mandatory and “comply or explain” rules, as well as entity- and product-level rules. Companies that perform activities not yet covered by the Taxonomy could complement their Taxonomy-alignment disclosure with an explanation that the results reflect the fact that their activities are not yet covered by the Taxonomy – as opposed to them being unable to meet technical screening criteria. The reason for this is that the EU wanted to get the environmental classification system up and running in time to meet approaching Paris Climate Agreement deadlines. Closely involved in its creation, Eila Kreivi, head of capital markets at the European Investment Bank, compares the taxonomy to a second language. FactSet Hong Kong Limited (0)20.3009.7000, Asia Pacific The Taxonomy will in due course replace the morass of voluntary schemes with a single classification system for the EU, starting with the environment, but with the express intention of extending the regime to cover social and governance considerations in the near future. Speaking at a press conference, Viñes Fiestas explained how the EU’s taxonomy works as a tool to guide investments in the transition. The EU Technical Expert Group on Sustainable Finance (EU TEG) is currently finalizing its work on selected actions of the EU Action Plan on Sustainable Finance. Article 3 activities are those that “substantially contribute” to one or more of the following six Article 9 “Environmental Objectives”: These Article 9 objectives are further defined in Articles 10 to 15 and in pending delegated legislation that will specify “Technical Screening Criteria” for each objective. Each objective is explained further in the Taxonomy Regulation and linked to any existing EU law on that area. Under the current timetable, as set out in Article 26(2) of the Taxonomy Regulation, the European Commission will report on proposals for a broader ESG taxonomy by December 31, 2021. FactSet UK Limited Specifically, Article 8 requires entities subject to the NFRD to disclose in their non-financial statements “information on how and to what extent their activities are associated with environmentally sustainable economic activities under Articles 3 and 9 of the [Taxonomy Regulation]” including: The European Commission is required to adopt a Delegated Act by June 1, 2021, specifying the content and presentation of the information to be disclosed and the methodology used, taking into account the specificities of both financial and non-financial undertakings and the technical screening criteria established under the Taxonomy Regulation. This section sets out the role and importance of sustainable finance in Europe from a policy and investment perspective, the rationale for the development of an EU Taxonomy, the daft regulation and the mandate of the TEG. Further granularity will be given in technical screening criteria, which will be built up over time and are to be updated on a regular basis to reflect the changing nature of the science and technology that underpin them. In short, the EU Taxonomy may well pose an existential threat to existing voluntary schemes, creating a new ESG world order. However, only time will tell if the lack of legal authority behind the proposed ruleset will prevent it from superseding the EU taxonomy as the default global ESG standard. Officially called “Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088,” nowhere is the term “taxonomy” used. +852.3710.6100, Support FactSet Research Systems Inc. It is arguable that these rules already exist within the EU acquis in some form or other, whether through express legislation or implicitly in fundamental EU constitutional principles such as those found in the Treaty on the Functioning of the EU (TFEU). In terms of the latter, the SFDR distinguishes between genuinely “sustainable investments” (Article 9 of the SFDR) and investments that merely promote the ESG characteristics of an investment (Article 8 of the SFDR). The report contains recommendations relating to the overarching design of the EU Taxonomy, as well as extensive implementation guidance on how companies and financial institutions can use and disclose against the taxonomy. “Do No Significant Harm” criteria have also been added for climate change mitigation. +44. After the publication of this final report, the TEG will continue to operate in an advisory capacity until the new Platform on Sustainable Finance – a permanent body set up under the Taxonomy Regulation – is operational. Unconstrained by the EU legislative process, they may succeed in winning the race. The Taxonomy Regulation imposes additional requirements on large public interest entities (including credit institutions and insurance companies) which are subject to requirements under the EU Non-Financial Reporting Directive. The taxonomy labels an economic activity as environmentally sustainable if it substantially contributes to at least one of six EU environmental objectives without significantly harming any of the others, and complies with minimum social safeguards. Moreover, given that the rules only apply when seeking to establish whether an investment is “environmentally sustainable,” their impact is relatively modest. • The EU Taxonomy is a proven climate tracking tool that can help identify investments which make a significant contribution to climate mitigation and adaptation. In order to reach the goals of climate neutrality, sustainable economic growth, and inclusion of all countries, a classification system … This year, the world’s third-largest asset manager by assets under management (AUM) and the world’s... Background to the Taxonomy Regulation. Should the NFRD be modified, practice would match principle, as set out in the simplified diagram below. Almost all students start by learning the classification system – Kingdom, Phylum, Class, Order, Family, Genus, Species. However, on June 18, 2020, the presidents of the European Council and Parliament announced that they had signed the EU Taxonomy Regulation into law, which was published in the EU’s Official Journal just four days later, heralding a new era of financial regulation. PART A Explanation of the Taxonomy approach. The Taxonomy Regulation also introduces new disclosures for corporates subject to the NFRD. In summary, over the short term, there are no plans in the U.S. to adopt regulation to address the lack of standardization in ESG definitions and processes. The expanded taxonomy now covers activities in sectors that produce 93% of Europe’s emissions, including activities such as electricity generation, urban transport, crop-agriculture and cement-manufacturing. ESG Considerations in the Insurance Space. By providing asset owners with the data they need, it will unleash a flow of capital to sustainable investments. For example, companies that are not required to publish non-financial statements, like SMEs, may decide to publish information on their website regarding their alignment with the Taxonomy Regulation. The taxonomy is the EU’s antidote to greenwashing. Together these new EU measures will have an impact far beyond the geographical boundary of the EU, shaping the flow of investments, the broader financial regulatory arena, and the working practices of many financial professionals. Whilst the fate of the Taxonomy Regulation hung in the balance, there was still a genuine chance that the ESG regime might wilt on the vine before it had the chance to blossom, especially with Member States publicly challenging the position of their peers on matters ranging from forestry to nuclear power. (update June 19, 2020 : The text was adopted by the Council on June 10, 2020 , and endorsed by the European Parliament on June 18, 2020). By following the recommendations of the IIF to pool their efforts, they also started a race to create the premiere transnational ESG framework, in a potentially zero-sum “winner takes all” bid to become the principal international ESG standard and one of the most important and impactful rulesets on the planet. As such, it was decided that a broader ESG taxonomy would be hammered out after the environmental system went live. Moreover, the European Commission Consultation launched in February 2020 (accompanied by a Background Document) proposes to expand the application of the Directive and reconcile the disclosure requirements of the NFDR with the reporting requirements of the SFDR and Taxonomy. Give their investors a complete overview of the Taxonomy Regulation and linked to the other actions the... May well pose an existential threat to existing voluntary schemes, creating a new ESG Order... Two linked posts: “ it must be Green unified Taxonomy and the SFDR rules are further down... 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