EU TAXONOMY REGULATION: ENCOURAGE INVESTMENTS TOWARDS SUSTAINABILITY PROJECTS

Europe aims to become the world's first carbon-neutral continent. To realize this vision and channel investments into sustainable projects, the European Union (EU) has introduced the EU Taxonomy Regulation. This innovative legislation introduces a standardized system for identifying what counts as environmentally sustainable economic activities, giving investors, businesses and policymakers a clear guide to the complex field of sustainable finance.

As a key component of the European green deal, the regulation is crucial for directing investments towards projects that genuinely support environmental goals. By providing a standardized definition of which economic activities can be considered environmentally sustainable, the EU Taxonomy facilitates a shared understanding among both financial and non-financial entities. In this way, it plays an important role in:

• Scale up sustainable investments across the EU

• Provide security for investors and protect them from greenwashing

• Support companies in becoming more climate-friendly 

• Mitigate market fragmentation  

According to the Taxonomy Regulation, there are 4 overarching conditions that an economic activity has to meet in order to qualify as environmentally sustainable (Taxonomy-aligned):

1. Making a substantial contribution to at least one of the environmental objectives:

   1. Climate change mitigation 

   2. Climate change adaptation 

   3. The sustainable use and protection of water and marine resources 

   4. The transition to a circular economy 

   5. Pollution prevention and control 

   6. The protection and restoration of biodiversity and ecosystems 

2. Doing no significant harm to any of the other five environmental objectives

3. Complying with minimum safeguards

4. Complying with the technical screening criteria

Scope

Only companies subject to the  Corporate Sustainability Reporting Directive (CSRD) are required to comply with the Taxonomy Regulation by disclosing in their annual reports how their activities align with the Taxonomy (Taxonomy-eligibility) and meet the criteria set out in the Taxonomy delegated acts (Taxonomy-alignment). Companies not covered by the CSRD can choose to disclose this information voluntarily to access sustainable financing or for other business-related reasons.

In April 2021, the European Commission adopted the EU Taxonomy Climate Delegated Act to establish the criteria for economic activities crucial for achieving climate neutrality. The act identified over 80 activities across various sectors, including forestry, environmental protection and restoration, manufacturing, energy water supply, sewerage and others. Additionally, for adaptation-related activities, it covers financial and insurance activities, education, human health, social work activities, arts, entertainment and recreation.

Later, in March 2022, the Commission introduced the Complementary Climate Delegated Act, specifying criteria for the gas and nuclear energy sectors.

The regulation also interacts with the EU Sustainable  Finance Disclosure Regulation (SFRD): According to Articles 5 and 6 of the Taxonomy, all financial products that fall under Articles 8 (products promoting environmental or social characteristics, provided the invested companies adhere to good governance practices) and 9 (products aiming for sustainable investment) of the SFDR must reveal the extent to which their underlying investments align with the Taxonomy. Specifically, financial products disclosed under Article 8 of the SFDR have sustainable investment as their primary goal.

The EU Taxonomy Compass provides the latest list of Taxonomy-aligned economic activities, though activities not listed do not necessarily imply unsustainability; it may indicate that criteria are still under development.

Timeline

The reporting obligations and timelines for undertakings are set out in the Disclosures Delegated Act, which supplements Article 8 of the Taxonomy Regulation. Here is a timeline overview:

• 12 July 2020: The EU Taxonomy Regulation entered into force.

• 1 January 2022 - 31 December 2022: Non-financial entities disclosed the proportion of Taxonomy eligible and non-eligible economic activities in their total turnover, capital, and operational expenditure, along with the qualitative information as in Annex I.

• 1 January 2022 - 31 December 2023:

  • Financial entities disclosed the proportion in their total assets of exposures to Taxonomy eligible and non-eligible economic activities, the proportion in their total assets of the exposures referred to in Article 7 and the qualitative information referred to in Annex XI.

  • Credit institutions disclosed the proportion of their trading portfolio and on-demand inter-bank loans in their total assets.

  • Insurance and reinsurance undertakings disclosed the proportion of Taxonomy-eligible and Taxonomy non-eligible non-life insurance economic activities.

• 1 January 2023: Non-financial entities began disclosing their key performance indicators, including any accompanying information as specified in Annexes I and II.

• 1 January 2024: Financial entities must now disclose their key performance indicators, including any accompanying information as specified in Annexes III, V, VII, IX, and XI.

• 1 January 2026: Sections 1.2.3 and 1.2.4 of Annex V will come into effect.

Embracing blockchain technology for compliance

Navigating the EU Taxonomy Regulation can be complex, but it's crucial for businesses and financial institutions. To ensure compliance and maximize benefits we recommend you to:

1. Engage experts and stakeholders to ensure compliance and effective implementation.

2. Develop a comprehensive sustainability strategy that encompasses ESG considerations.

3. Invest in robust data management systems to collect, analyze, and disclose the necessary information required, because leveraging technology and automation can streamline these processes.

4. Embrace transparency and accountability to build trust, enhance reputation and support long-term sustainability objectives.