Unconstrained by the EU legislative process, they may succeed in winning the race. Taxonomies are an important part of categorizing your WordPress site’s content, but the term often confuses beginners because “taxonomy” isn’t something most of us hear in daily life. Article 3: Environmentally Sustainable Economic Activities. The  tricky relationship between these two principles has not been lost on the European Supervisory Authorities, who, in their April 23, 2020, Joint Committee Consultation Paper on SFDR delegated legislation, discuss the consequences of having these two similar yet separate principles intersecting, together with a litany of other discontinuities and difficulties that arise between the Taxonomy and the SFDR texts. 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. PART A Explanation of the Taxonomy approach. 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). We would like to note however, that we have several questions and concerns about the usability of the Taxonomy in its current form. FactSet Hong Kong Limited The Taxonomy Regulation introduces a sustainability classification system through which investment firms must classify investments based on NFRD data (and other datasets). And more importantly, what … The EU Taxonomy is a tool to help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy. Provide clarity on what it takes, within specific industries, to achieve the commitments made under … (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). 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). In order to reach the goals of climate neutrality, sustainable economic growth, and inclusion of all countries, a classification system … 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 … 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. 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). 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. 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 EU Parliament has already formulated its position on the legislative proposal with respect to Taxonomy, and the next step will be to reach an agreement with the Commission and the Council. +1.877.322.8738, Sustainable Finance Disclosure Regulation, The Sustainable Finance Disclosure Regulation, The OECD Guidelines for Multinational Enterprises, The UN Guiding Principles on Business and Human Rights, The Declaration on Fundamental Rights and Principles at Work, International Labour Organization Declaration's Eight Fundamental Conventions. What does the proposed EU Taxonomy mean? 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. 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. 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). A unified taxonomy and the monitoring of sustainab ility of investments will support the uptake of sustainable finance in the European financial sector. In contrast to the position in the U.S., the EU is adopting standardized definitions through its recently published 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. The taxonomy is the EU’s antidote to greenwashing. Required fields are marked *. The detailed joint statement outlines and analyses ten priority areas of concern in the European Commission’s draft. 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. 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. The Taxonomy is based legally on a political agreement reached on December 17, 2019. 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 EU Green Deal is Von der Leyen Commission’s program aiming to make Europe’s economy more sustainable. 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. However, with the publication of the Taxonomy Regulation, the theoretical timelines from a few weeks ago have now crystallized into hard compliance deadlines. Articles 5 of the Taxonomy Regulation interfaces with Article 9 of the SFDR and adds taxonomy-specific pre-contractual and periodic reporting disclosures. 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. 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. It is a classification system that enables categorization of economic activities/sectors that play key roles in climate change mitigation and adaptation. Article 10(2) “transition activities” are activities for which there are no technologically and economically feasible low-carbon alternatives and which support the transition to a climate-neutral economy in a manner that is consistent with “a pathway to limit the temperature increase to 1.5 ⁰C above pre-industrial levels.” Transition activities only relate to Article 9 “Climate Change Mitigation” Environmental Objective (as further explained in Article 10). 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. Almost all students start by learning the classification system – Kingdom, Phylum, Class, Order, Family, Genus, Species. On 9 March 2020, the TEG published its final report on EU taxonomy. 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