The new EU classification for sustainable investments (EU taxonomy)

“The world's first-ever green list”

After a long and difficult political process, the first common classification system for “green” economic activities is on its way to becoming a reality. The Taxonomy Regulation aims to provide investors with standardised definitions to help them evaluate the environmental impact of their investments and reduce “greenwashing”. It distinguishes between six environmental objectives and prescribes methods for evaluating economic activities according to these objectives.

Detailed technical screening criteria for each environmental objective are also being developed, with the first delegated acts (for environmental objectives 1 and 2) expected in December 2020. The criteria will likely be based on the June 2019 proposals by the technical expert group on sustainable finance. Furthermore, detailed regulatory technical standards for a corresponding disclosure is envisioned, starting from mid-2021.

Political agreement on the Taxonomy Regulation text was confirmed by the Council’s Committee of Permanent Representatives (COREPER) on 5 February 2020, marking another step towards its finalisation. The final Regulation is expected to be published in the Official Journal in May 2020.

Are you ready?

To respond to the implications of the taxonomy, financial market participants and financial advisors should address the following:

Due diligence process

A detailed assessment of the manufactured or distributed financial products will be required. This could be performed as part of an internal or external due diligence process.

ESG data

The assessment requires robust and detailed ESG data on the underlying assets and economic activities. This might require a conversation with companies or issuers on the provision of the required data and their independent assurance. Depending on the selected implementation approach, the process might involve external ESG data providers, ESG rating agencies, ESG scores or different tools for ESG analysis.

Investment strategy

Based on the due diligence results, corrective actions might be required (divestment, underweighting, allocation). Implementation of the taxonomy should complement the implementation of other regulatory requirements stemming from the EU Action Plan, such as incorporating ESG factors into product management, portfolio management and risk management.

Reporting systems

The taxonomy will affect various disclosure documents and will thus require changes to the current reporting process, likely having an impact on IT systems.

Further resources

• Text of the political agreement
• TEG final report on the EU taxonomy
• Technical annex to the TEG final report on the EU taxonomy