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As we noted in our first article on sustainable finance, climate issues are now among the financial sector’s concerns. To better gauge the stakes of this green (r)evolution, droitbancaire.be looks back in this article at the historical context that led to the regulatory changes and examines the European Taxonomy.
Sustainable finance in Europe: a historical perspective
On 25 September 2015 the UN General Assembly adopted the 2030 Agenda for Sustainable Development, built around the sustainable development goals and based on three dimensions of sustainability: economic, social and environmental. The Paris Agreement was approved by the Union on 5 October 2016; its aims include strengthening the response to the threat of climate change by making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. The Commission’s communication of 22 November 2016, Next steps for a sustainable European future, links the sustainable development goals with the Union’s action framework, so that all the Union’s strategic actions and initiatives must integrate those goals from the outset. A High-Level Expert Group was then set up. In its conclusions of 20 June 2017 the Council confirmed the will of the Union and its Member States to implement the 2030 Agenda fully. On 31 January 2018 the High-Level Expert Group published its final report, offering a global vision of how to build an EU sustainable finance strategy: sustainable finance must satisfy two imperatives, improving the financial system’s contribution to sustainable and inclusive growth by financing society’s long-term needs, and strengthening financial stability by integrating ESG factors into investment decisions. On 8 March 2018 the Commission published its Action Plan: Financing Sustainable Growth, taking up the group’s recommendations and launching an ambitious global strategy, one objective being to reorient capital flows towards sustainable investments. On 11 December 2019 the Commission published the European Green Deal, aiming to transform the EU into a modern, resource-efficient and competitive economy with no net greenhouse gas emissions by 2050 and growth decoupled from resource use. On 12 December 2019 the European Council adopted conclusions on climate change. Regulation (EU) 2020/852 of 18 June 2020 establishing a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 (the Taxonomy Regulation) fits into this context and the Green Deal’s sustainable finance plan, and is seen as an essential step towards a climate-neutral Union by 2050.
The Taxonomy: what is it?
The Taxonomy Regulation establishes classification and disclosure rules to give all financial and non-financial players a common understanding of what should be considered a sustainable economic activity. This encourages businesses to develop sustainable, environmentally respectful activities and encourages investors to finance such long-term projects, promoting sustainable finance while avoiding greenwashing risks. The Regulation rests on two types of rules: rules classifying economic activities and disclosure rules imposed on financial players and non-financial undertakings in relation to those activities.
The classification rules of the Taxonomy Regulation
Setting up a unified classification system for sustainable activities is the most important measure envisaged in the Action Plan of 8 March 2018. Before the Regulation, several Member States had label systems (in Belgium, the Towards Sustainability Initiative), based on different classification systems and potentially different criteria. The Action Plan recognises the need for a common, global understanding of the environmental sustainability of activities and investments in order to reorient capital flows. Within the classification rules, two notions must be distinguished: sustainable economic activities, also called activities aligned with the taxonomy, and activities eligible for the taxonomy. These two notions determine the information the undertakings concerned must provide.
What are aligned activities? Sustainable economic activities (aligned activities) are defined in article 3 of the Regulation. They must contribute substantially to one or more of the 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; and the protection and restoration of biodiversity and ecosystems. For each objective the Regulation sets the general principles for determining which activities contribute substantially. The Commission adopted a Delegated Act (the Climate Delegated Act) on the first two objectives (mitigation and adaptation); the other four objectives will be the subject of further delegated acts. The activity must also do no significant harm to any other environmental objective and respect minimum human rights and labour law safeguards (article 18, notably the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights). Finally, to allow the precise assessment of activities’ contribution, the Commission must establish, through delegated acts and on the basis of an expert group’s work, performance measures called technical screening criteria, which complete the general principles and whose compliance is required for an activity to be qualified as sustainable.
What are eligible activities? Activities eligible under one of the environmental objectives are those exhaustively listed in the annexes to the Climate Delegated Act, i.e. those capable of contributing substantially to that objective, regardless of whether they comply with the technical screening criteria and respect the minimum safeguards.
The disclosure obligations of the Taxonomy Regulation
The disclosure obligations complete the sustainability disclosure rules set in Regulation (EU) 2019/2088 (the SFDR). To increase transparency and give final investors an objective benchmark on the share of investments financing environmentally sustainable activities, the Taxonomy Regulation completes the transparency rules in pre-contractual disclosures and periodic reports set in the SFDR. The definition of sustainable investment in the SFDR includes investments in economic activities contributing to an environmental objective, which should notably include investments in environmentally sustainable economic activities within the meaning of the Taxonomy Regulation. The SFDR only considers an investment sustainable if it does no significant harm to any environmental or social objective. To determine whether a given activity is environmentally sustainable, a list of six environmental objectives was drawn up (see above). The disclosure obligations on undertakings appear in article 8 of the Regulation and are specified in a Delegated Act (the Article 8 Delegated Act). Under article 8, undertakings subject to the obligation to publish non-financial information under articles 19a and 29a of Directive 2013/34/EU, as amended by Directive 2014/95 (NFRD) (mainly credit institutions, insurance undertakings and listed companies exceeding, alone or with their consolidated subsidiaries, 500 employees and a balance sheet total of EUR 20 million or turnover of EUR 40 million), must include in their non-financial statement information on how and to what extent their activities are associated with sustainable economic activities. They must publish key performance indicators: the share of their turnover from products or services associated with environmentally sustainable economic activities, and the share of their capital expenditure and operating expenditure linked to assets or processes associated with such activities. The Article 8 Delegated Act defines the relevant quantitative indicators and qualitative information, specifies the KPIs applicable to financial undertakings and the content, presentation and method for all undertakings; its annexes determine how undertakings must indicate the extent to which their activities are associated with environmentally sustainable activities.
Entry into force
The Climate Delegated Act and the Article 8 Delegated Act were published in the Official Journal on 9 and 10 December respectively. The Taxonomy Regulation obligations thus began to apply from 1 January 2022, in relation to the 2021 financial year, as regards the two climate objectives; delegated acts will be adopted for the other four. The Article 8 Delegated Act provides a transitional regime for the first year of application, from 1 January to 31 December 2022, to reflect that undertakings will not have time to collect all the necessary data and assess their activities’ compliance with the technical screening criteria; its article 10 provides simplification measures for the 2022 disclosure on 2021 data. From the 2023 financial year (on 2022 data), undertakings must fully comply. For the four other environmental objectives, entry into force is set for 1 January 2023.
This article is a translation and a condensed version. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.
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