EU introduces regulation to identify environmentally sustainable activities

The Taxonomy Regulation (31 page / 750KB PDF) provides an overall framework for determining whether an activity contributes substantially to one or more environmental factors, and does not significantly harm any environmental objectives.

The Regulation will apply to firms selling financial products, including alternative investment funds, insurance-based investment products, and UCITS (Undertakings for Collective Investment in Transferable Securities) funds.

The Regulation sets out six environmental objectives and outlines how activities can contribute substantially to each of those objectives. The six objectives are climate change mitigation and 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.

Together with the Disclosure Regulation introduced late last year, the Taxonomy Regulation will also impose disclosure obligations on the degree to which products are financially sustainable. It will also require asset managers to use technical screening to assess the degree to which products are aligned with the taxonomy, including the methodology to express this as a percentage.

Investment funds regulation expert Oliver Crowley of Pinsent Masons, the law firm behind Out-Law, said the taxonomy was a “big leap forward” in creating a common language for determining what constitutes an environmentally sustainable activity.

“Market participants will need to become conversant with the language in the taxonomy, as it will permeate their disclosures going forward, with the taxonomy forming the bedrock for EU sustainable finance regulation. Whilst the technicalities of how it will apply in the UK remain to be ironed out, the clear signal from the UK government is that the framework of the taxonomy will play an important role going forward, so UK market participants will also need to be familiar with the regime,” Crowley said.

The Taxonomy Regulation was published on 18 June and enters into force on 12 July 2020. The disclosure requirements will apply from 1 January 2022 when they relate to climate change mitigation and climate change adaptation environmental objectives, and from 1 January 2023 when they relate to the other environmental objectives within the regulation.

In a letter to the House of Commons European Scrutiny Committee at the end of May, economic secretary to HM Treasury John Glen confirmed the UK will retain the framework for the taxonomy at the end of the Brexit implementation period.

The UK has committed to at least a 100% reduction of greenhouse gas emissions – compared to 1990 levels – in the UK by 2050. Last week the Committee on Climate Change’s annual report recommended increased government action to meet the target, using the recovery from the coronavirus pandemic as a catalyst.

The Taxonomy Regulation also introduces the concept of an EU Platform on Sustainable Finance, which will advise the European Commission on certain matters relating to the taxonomy.