The SFDR (as supplemented by the Taxonomy) requires investment firms to disclose: Depending on the rule in question, the relevant SFDR disclosure will appear in one or more of the following locations: on the investment firms website, in periodic reports, in promotional material, and/or in pre-contractual documentation. 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). 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. It is a classification system (known as a "taxonomy") which will help investors identify what is, or is not, sustainable. At the core of the Taxonomy Regulation is the definition of a sustainable economic activity. The first delegated Act concerned climate change adaptation and mitigation objectives. Lets start with the basics. The draft report prepared by the dedicated Platform subgroup, the Technical Working Group (TWG), is an important step in the Platform's main mandate under the Taxonomy Regulation to advise the Commission on the development of the EU taxonomy, and in particular on the development of technical screening criteria (TSC) for the 6 environmental objectives as set out in the Taxonomy Regulation. Implementing and delegated acts. /esg/insights/a-short-guide-to-the-eu-s-taxonomy-regulation According to article 8 of the Taxonomy regulation, companies based in Europe, or operating a European legal entity with more than 500 employees (or less subject to national transposition of the . Brought to you by Lexparency.org. Nevertheless, introducing this enormous body of international rules by the back door is somewhat extraordinary, if not unprecedented. to this end, the taxonomy regulation provides criteria to allow companies and financial market participants to label specific economic activities and related investments as "environmentally sustainable," and eu rules require a growing number of companies and investors to report on the degree to which their economic activities and investments These acts will define the technical screening criteria for each pre-cited objective. 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 applies to. In essence, article 6 requires asset managers to disclose the integration of sustainability risks in their funds- regardless if the fund is promoted as ESG or not. It does no significant harm to any of those six environmental objectives (i.e., avoids adverse environmental impacts). The Taxonomy Regulation empowers the Commission to adopt delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in the directive. The Commission launched an ITtool on the EUtaxonomy for sustainable activities (the taxonomy compass) that will facilitate the use of the taxonomy by allowing users to navigate easily through its contents. The Taxonomy Regulation tasks the Commission with establishing the actual list of environmentally sustainable activities by defining technical screening criteria for each environmental objective through delegated acts. for this purpose, an economic activity qualifies as environmentally sustainable where it: (i) contributes substantially to one or more of the environmental objectives, (ii) does not significantly. 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. Should the NFRD be modified, practice would match principle, as set out in the simplified diagram below. The SFDR rules are further broken down into mandatory and comply or explain rules, as well as entity- and product-level rules. This is known as Article 5 and Article 6 Taxonomy disclosure. With just over six months to go before the EU Taxonomy Regulation (EU/2020/852) (the " Regulation ") becomes effective, firms which are subject to the EU Sustainable Finance Disclosure. The EUs new Taxonomy Regulation is designed to support the transformation of the EU economy to meet its European Green Deal objectives, including the 2050 climate-neutrality target. It provides a common language for a range of European sustainable finance regulations, including Sustainable Finance Disclosure Regulation ( SFDR ). The EU Taxonomys definitions and rules determine which economic activities are environmentally sustainable. [8] Taxonomy Regulation, Article 20 Platform on Sustainable Finance. The Taxonomy is primarily a classification system for economic activities. Any undertaking subject to the NFRD needs to disclose how, and to what extent, its activities are associated with activities that are considered as environmentally sustainable. To promote sustainable investment, the Taxonomy Regulation (Regulation (EU) 2020/852) establishes a European Union-wide classification system to identify economic activities that are considered sustainable. The disclosure will cover how and to what extent the investments underlying the financial product are in economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. Article 8(3) specifies the publishing parameters of reporting both against the Taxonomy Regulation and the NFRD. Where they promote environmental characteristics, Article 5 of the Taxonomy Regulation shall apply mutatis mutandis. AIMA regulatory responses / comment letters, Government and Regulatory Affairs Newsletters, Holding Strong: Alternative Investments in a Volatile Market, Bridging the gap: Mapping the liquid alternatives universe, https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/sustainable-finance-taxonomy-spotlight_en.pdf, Global Policy & Regulatory Forum 2022 - Top Takeaways, ACC ESG Insights Vol 7 - Current Trends in Investor Reporting, ACC publishes ESG Insights on Current Trends in Investor Reporting, AIFMD Negotiations See Differences of Opinion Between Negotiating Team, Osbourne Clarke - International Funds Legal Update | October 2022 | ESG developments, Asset and wealth management revolution 2022 - Exponential expectations for ESG, Government and Regulatory Affairs Newsletter - October 2022, AIFMD Negotiations Continue In European Parliament. While the Taxonomy Regulation is a piece of EU legislation establishing an EU-wide classification system, it will also impact non-European asset managers offering financial products into the EU. The Taxonomy Regulation empowers the Commission to adopt delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in the directive. For each activity, the TSC lay out thresholds to define compliance with do no significant harm. The Taxonomy Regulation establishes six environmental objectives Climate change mitigation Climate change adaptation The sustainable use and protection of water and marine resources The transition to a circular economy Pollution prevention and control The protection and restoration of biodiversity and ecosystems The firm needs to feed the analysis into the SFDR disclosures by way of Articles 5 and 6 of the Taxonomy Regulation, which is the principal mechanism through which the regulation makes its presence felt in the world: In many respects, the Taxonomy can be regarded as a very elaborate set of marketing rules. In defining financial product, the Taxonomy Regulation refers to the definitions embedded in the Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainabilityrelated disclosures in the financial services sector (the Disclosure Regulation): The Taxonomy Regulation provides a definition of environmentally sustainable economic activities. Background:Article 10(3) and Article 11(3) of the Taxonomy Regulation require the Commission to establish technical screening criteria6to determine the conditions under which certain economic activities qualify as contributing substantially to climate change mitigation and adaptation, the first two environmental objectives. financial market participant means: (a) an insurance undertaking which makes available an insurancebased investment product (IBIP); (b) an investment firm which provides portfolio management; (c) an institution for occupational retirement provision (IORP); (d) a manufacturer of a pension product; (e) an alternative investment fund manager (AIFM); (f) a panEuropean personal pension product (PEPP) provider; (g) a manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013; (h) a manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013; (i) a management company of an undertaking for collective investment in transferable securities (UCITS management company); or (j) a credit institution which provides portfolio management;. 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. Given the level of detail involved, firms should work through the taxonomy requirements and those firms in scope will need to align their approaches with the Regulation. esgSubNav, Discover more about S&P Global's offerings, Contribute to at least one of six environmental objectives listed in the Taxonomy; and. Article 8(4) of the Taxonomy Regulation requires the Commission to adopt a delegated act to specify the content, methodology, and presentation of information to be disclosed by both non-financial and financial undertakings by June 2021. As such, it was decided that a broader ESG taxonomy would be hammered out after the environmental system went live. The investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable economic activities.. This is achieved by amending the disclosure requirements in the EUs Non-Financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR). Article 6 of the Taxonomy Regulation provides that where a financial product referred to in Article 8 (1) SFDR promotes environmental characteristics, the requirements of Article 5 of the Taxonomy Regulation also apply. Speed read - As the start date looms for the Regulatory Technical Standards (RTS) under SFDR and the product disclosure regime in the Taxonomy Regulation, firms are progressing their. 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. The viability of the EUs ESG regulatory regime had been in doubt up until very recently. It is also adopting standardized processes through its Sustainable Finance Disclosure Regulation(SFDR). It represents a key step towards the EU's objective of achieving a climate neutral union by 2050. 4437037 Enabling activities allow other activities to make a substantial contribution to one or more of the Taxonomys six objectives. Regulatory stories dominating the conversation in April 2022. This Taxonomy is one of the EU's sustainable finance and climate program strongholds, and a part of the sustainable finance legislation that involves the Low Carbon Benchmarks Regulation and the Disclosure Regulation. The Taxonomy entered into force on 12 July 2020. 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. Moreover, the Taxonomy applies directly to Member States, who are prohibited from introducing domestic rules that would compromise the integrity of the Taxonomy regime. At the time of writing there are no further details but expanding the scope of the Taxonomy Regulation would have an impact on market participants. The percentages of taxonomy alignment will help firms explain their strategies in a way that is consistent and easily comparable for investors. When complying with those minimum safeguards, undertakings should adhere to the principle of do no significant harm referred to in the Disclosure Regulation. Click here. For the text of the Disclosure Regulation as published in the Official Journal, click here. To ensure consistency between the Taxonomy regulations concept of do no significant harm and the Disclosure Regulations concept of adverse impact indicators, the Taxonomy Regulation amends the Disclosure Regulation mandating that the ESAs[12] jointly develop regulatory technical standards relating to content and presentation of information relating to the principle of do no significant harm. By Philippa List; Mikhaelle Schiappacasse, Dechert LLP. The information to be disclosed in accordance with Articles 6(3) and 11(2) of Regulation (EU) 2019/2088 shall be accompanied by the following statement: The do no significant harm principle applies only to those investments underlying the financial product that take into account the EU criteria for environmentally sustainable economic activities. firms must follow the taxonomy regulation to comply with the SFDR. The tool allows users to navigate easily through the contents of the Climate Delegated Act. The 6 EU environmental objectives laid by the Taxonomy Regulation lays are: [13] climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, Download this article - PDF In December 2019 the European Council and the European Parliament reached political agreement on the text of a proposed Regulation on the Establishment of a Framework to Facilitate Sustainable Investment the so-called "Taxonomy Regulation.The Taxonomy Regulation[1] was published in the Official Journal of the EU on 22 June 2020, following its adoption by the European Parliament on 18 June 2020 and entered into force on 12 July 2020. The Parliament 6 and the Council 7 have both adopted their positions on the Regulation but have not yet reached political agreement. For example, the forthcoming EU proposal for an EU Green Bond Standard is expected to use the Taxonomy as the benchmark for eligibility. It aims 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.[2]. It is important to note that while the majority of the Taxonomy Regulation will impact asset managers who make available a financial product which either (a) has environmental sustainability as its objective or (b) promotes environmental characteristics, the Taxonomy Regulation also states that where financial market participants[3]do not take into account the criteria for environmentally sustainable investments they should provide a statement to this end, meaning that all asset managers are, effectively, in scope. The Taxonomy Regulation provides uniform criteria for companies and investors to determine whether an economic activity is "environmentally sustainable". Article 3 Criteria for environmentally sustainable economic activities, Article 4 Use of the criteria for environmentally sustainable economic activities in public measures, in standards and in labels, Article 5 Transparency of environmentally sustainable investments in pre-contractual disclosures and in periodic reports, Article 6 Transparency of financial products that promote environmental characteristics in pre-contractual disclosures and in periodic reports, Article 7 Transparency of other financial products in pre-contractual disclosures and in periodic reports, Article 8 Transparency of undertakings in non-financial statements, Article 10 Substantial contribution to climate change mitigation, Article 11 Substantial contribution to climate change adaptation, Article 12 Substantial contribution to the sustainable use and protection of water and marine resources, Article 13 Substantial contribution to the transition to a circular economy, Article 14 Substantial contribution to pollution prevention and control, Article 15 Substantial contribution to the protection and restoration of biodiversity and ecosystems, Article 17 Significant harm to environmental objectives, Article 19 Requirements for technical screening criteria, Article 20 Platform on Sustainable Finance, Article 24 Member State Expert Group on Sustainable Finance, Article 25 Amendments to Regulation (EU) 2019/2088, Article 27 Entry into force and application. This identified six environmental objectives, which an economic activity must adhere to, to be included in the EU Taxonomy. Watch this space. There are no technologically or economically feasible low-carbon alternatives; Green House Gas emission levels correspond to the best performance in the sector or industry; and. As a piece of EU legislation, its impact will be felt in the EU by entities such as AIFMs, UCITS management companies, investment firms authorised under MiFID II that provide portfolio management or investment advice, and these entities will need to ensure that they use the framework taxonomy when making disclosures (including, but not limited to, in prospectuses, portfolio management agreements, annual reports, non-financial statements, and on websites). This article outlines the key components of the Proposed Taxonomy Regulation (as proposed by the Commission), how it will apply and the next steps towards its implementation. Factsheet: How does the EUTaxonomy fit within the sustainable finance framework? They also need to consider how the new requirements will affect their marketing as well as their broader and product-/portfolio-specific investment strategies. The delegated act is applicable from 1January2022. 8 SFDR / Art. The Taxonomy Disclosures Delegated Act introduced the term 'taxonomy-eligible economic activities'. The EU ESG regulatory regime is comprised of several disparate measures, nearly all of which intersect with the Taxonomy in some way. In other words, it appears that compliance with Articles 5 and 6 of the Taxonomy Regulation is dependent on the actual investments made, not what is stated in a product's pre-contractual disclosures. content At present, there is a gap between the data disclosed pursuant to the NFRD and the data required by the SFDR and Taxonomy Regulation. periodic report Art. 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). These TSCs are being elaborated in secondary legislation called Delegated Acts (DAs). Further, less than 10 days later, on June 19, 2020the day after the announcement that the Taxonomy had been signed into lawResponsible 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 TCFDacross all sustainability targets, whilst also inviting the International Financial Reporting Standards Foundation to join them. The activity must comply with the minimum safeguards laid down in in the Taxonomy Regulation's Article 18, and. An activity must: The six environmental objectives of the Taxonomy are: (1) climate change mitigation, (2) climate change adaptation, (3) sustainable use and protection of water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, and (6) protection and restoration of biodiversity and ecosystems. 1. description of how sustainability risks are integrated into investment decisions. Social and governance factors also feature in the new Taxonomy Regulation, but only as a component (rather than as a principal focus) of the regime, which is dedicated to environmental considerations. For financial products that do not do not consider the EU criteria for environmentally sustainable economic activities, the entity must make this statement in its disclosure. The Taxonomy Regulation also introduces new disclosures for corporates subject to the NFRD. Article 6(3) of the regulation provides a list, per type of FMP, in which type of pre-contractual disclosure an FMP needs to disclose information. This is known as Article 5 and Article 6 Taxonomy disclosure. The overarching aim of the Taxonomy Regulation is to provide a common language to identify which activities and financial instruments can be considered as environmentally sustainable to be used by investors, financial institutions, companies and issuers. For example, it requires certain entities to disclose information concerning the degree of alignment of their activities with the Taxonomy. Compliance with the technical screening criteria for the relevant environmental objective pursuant to the Taxonomy Regulation's Articles 10(3), 11(3), 12(2), 13(2), 14(2), and 15(2) must also be satisfied. However, the Regulation also places new Taxonomy linked disclosure obligations on companies and on financial market participants. Do no significant harm to any of the other objectives, while respecting basic human rights and labour standards. 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. On 15July2022, the Complementary Climate Delegated Act including, under strict conditions, specific nuclear and gas energy activities in the list of economic activities covered by the EUtaxonomy was published in the Official Journal. Summary of the public feedback on the draft Delegated Act supplementing Regulation (EU) 2020/852 published on 20November2020, Press release on the draft delegated act - 20November2020, Text and annexes of the draft delegated act published on 20November2020, Received feedback on the draft delegated act published on 20November2020, Contact Directorate-General for Financial Stability, Financial Services and Capital Markets Union, Directorate-General for Financial Stability, Financial Services and Capital Markets Union. Related information: EU taxonomy for sustainable activities. 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 EUs Official Journal just four days later, heralding a new era of financial regulation. In addition, the Taxonomy Regulation will impose additional pre-contractual . Article 6 Transparency of financial products that promote environmental characteristics in pre-contractual disclosures and in periodic reports Where a financial product as referred to in Article 8 (1) of Regulation (EU) 2019/2088 promotes environmental characteristics, Article 5 of this Regulation shall apply mutatis mutandis. Where a financial product is not subject to Article 8(1) or to Article 9(1), (2) or (3) of Regulation (EU) 2019/2088, the information to be disclosed in accordance with the provisions of sectoral legislation referred to in Articles 6(3) and 11(2) of that Regulation shall be accompanied by the following statement: An economic activity is environmentally sustainable if: The disclosure obligations laid down in the Taxonomy Regulation supplement the rules on sustainability-related disclosures laid down in the Disclosure Regulation. This year, the worlds third-largest asset manager by assets under management (AUM) and the worlds 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. 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. Moreover, the term taxonomy, whilst somewhat oblique, is apposite since, at its simplest, the regulation is a classification system that identifies whether economic activities are sustainable from an environmental perspective. Regulatory stories dominating the conversation in May 2022. 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. The information is provided "as is" and does not constitute legal advice or binding interpretations of the SFDR. Funds classified as article 6 are non-ESG. The EU Taxonomy Regulation (EU TR), which went into effect 01 January 2022, provides an additional level of transparency to financial market participants by recognising and outlining six specific environmental objectives.
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