I.    SDGs, Green Deal and the Taxonomy Regulation

The European Commission is committed to ensure that all Union actions and policy initiatives take the Sustainable Development Goals (“SDGs”) on board at the outset. The Taxonomy Regulation (Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020) is a landmark for the achievement of the SDGs.

The proposal for the Taxonomy Regulation was presented by the Commission in May 2018. It was published in the Official Journal in June 2020 and entered into force on July 12, 2020. It is a classification system for sustainable economic activities, a key piece of legislation that will contribute to the Green Deal by boosting investment in green and sustainable projects, a powerful tool for a climate neutral EU by 2050.

EU Taxonomy as the world's first-ever “green list” that investors can use everywhere when investing in projects and activities with a positive impact on climate and environment

Work behind this regulation is enormous and it seems some international media have referred to the Taxonomy Regulation as a “boring” piece of legislation. It is however a key piece of law that may trigger an “exciting” new world of investment and financing.

For those not familiar with the massive work undertaken to date, it is unavoidable to refer to the (final) report of over 600 pages (including its technical annexes), issued on March 2020 by the Technical Expert Group on Sustainable Finance (“TEG”) set up by the Commission to assist in developing the taxonomy. Yet, it is just the beginning.


II.    Six Environmental Objectives

We note the Taxonomy Regulation sets out six environmental objectives:

  • climate change mitigation;
  • climate change adaptation;
  • sustainable use and protection of water and marine resources;
  • transition to a circular economy;
  • pollution prevention and control; and
  • protection and restoration of biodiversity and ecosystems.

An activity shall be considered compliant with the EU Taxonomy if it:

  • contributes substantially to one or more of the above environmental objectives, or enables other activities to make a substantial contribution to one or more of them;
  • does not significantly harm any of the other environmental objectives;
  • complies with technical screening criteria set out in subsequent delegated acts;
  • is carried out in compliance with certain safeguards (ref. OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of ILO on Fundamental Principles and Rights at Work and the International Bill of Human Rights).


III.    Delegated Acts

The adoption (in two phases) of subsequent delegated acts relates initially to two of the environmental objectives (climate change mitigation and climate change adaptation) and subsequently to the four remaining other (sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems).

First set of delegated acts required to be adopted by the Commission by 31 December 2020 and to apply from 1 January 2022 and subsequent set of delegated acts required to be adopted by 31 December 2021 and to apply from 1 January 2023.


IV.    Platform on Sustainable Finance

The Taxonomy Regulation also mandates the establishment of a Platform on Sustainable Finance. The group of experts in the Platform will have the task among others to advise the Commission on the technical screening criteria for the EU Taxonomy, including as regards their usability.


V.    Sustainability-Related Disclosures Regulation

EU Regulation on Sustainability‐Related Disclosures in the Financial Services Sector (Regulation (EU) 2019/2088 of the European parliament and the Council of 27 November 2019) is amended by the Taxonomy Regulation with new disclosure requirements, namely as regards products that have sustainable investment as their objective or which promote environmental characteristics, either alone or in combination with other objectives.

The new requirements shall apply in respect of the environmental objectives, climate change mitigation and climate change adaptation, from 1 January 2022; and in respect of the remaining environmental objectives from 1 January 2023.


VI.    Non-Financial Reporting Directive

The Taxonomy Regulation imposes additional requirements on undertakings which are subject to the obligation to publish a non-financial statement or a consolidated non-financial statement pursuant to the EU Non-Financial Reporting Directive (Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013).

Any such undertaking shall include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation.

In particular, they shall disclose the proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable and 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

The Commission shall adopt by June 2021 a delegated act to specify the content and presentation of the information to be disclosed pursuant to the above, including the methodology to be used in order to comply with them, taking into account the specificities of both financial and nonfinancial undertakings and the technical screening criteria established pursuant to the Taxonomy Regulation. The new requirements will apply from 1 January 2022 or 1 January 2023 depending on the environmental objective.


VII.    Greenwashing and Challenges Ahead

Overall, the Taxonomy Regulation aims to address concerns about “greenwashing”, by addressing the absence of a uniform criteria for activities to qualify as environmentally sustainable.

“Greenwashing” is defined by the Commission as the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met

While the EU Taxonomy opens several new possibilities for access to the capital markets, it is evident that it imposes also several new obligations to various entities which need to be accounted for in the context of business planning.

It is of essence that the work ahead by the EU Commission, namely as regards the subsequent delegated acts required for its full application, make the transition route smooth and clear, with sustainable ground for new investments and new financings.

It is of essence that companies prepare themselves ahead for the new requirements.