Stockholm (NordSIP) – On March 9th, the European Commission published the final recommendations of the Technical Expert Group on the EU Taxonomy. The report discusses the methodologies and steps recommended for the creation of an EU-wide tool to identify the environmental impact of specific economic activities, as well as the disclosure steps and timeline to be followed by companies, financial institutions and member states.
Technical Screening Criteria
According to the report, the Taxonomy sets environmental performance thresholds, referred to as ‘technical screening criteria’, for economic activities. The criteria will “help companies, project promoters and issuers access green financing to improve their environmental performance, as well as helping to identify which activities are already environmentally friendly. In doing so, it will help to grow low-carbon sectors and decarbonise high-carbon ones.”
The ‘technical screening criteria’ identify which sectors and activities make a substantive contribution to one of six environmental objectives. The six goals are climate change mitigation; climate change adaptation; sustainable and protection of water and marine resources; transition to a circular economy pollution prevention and control; and protection and restoration of biodiversity and ecosystems.
The screening criteria apply to economic activities “that make a substantive contribution to one of six environmental objectives, do no significant harm (DNSH) to the other five, where relevant. The economic activities should also meet minimum safeguards (e.g., OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights).
Who Does What When?
The report identifies three key taxonomy users, including financial institutions, large companies and EU member states.
Companies are expected to disclose their turnover, CAPEX and OPEX measures. According to the report, the turnover disclosure from companies will “allow investors to report the % of their fund invested in Taxonomy-aligned activities. Capex, in contrast, gives investors a very good sense of a company’s direction of travel. It is a key variable for assessing the credibility of a company’s strategy, and it helps investors decide whether they agree with their strategic approach.” These disclosures should be the minimum baseline, but the report also “recommends that company disclosure obligations under the NFRD are clarified to include disclosure on the basis of enabling and transition activities.” The report discusses how these company disclosures are to take place at company, project and asset level.
The TEG report also describes which market segments and financial products need to be disclosed against the taxonomy, including UCITS, Alternative Investment Funds Pensions, Insurance-based insurance products, securitisation funds, VC and PE funds.
According to the timeline described in the report, the technical screening criteria will be issued as part of the specific legal requirements from the European Commission by the end of 2020. Financial market participants will be required to complete their first set of disclosures against the Taxonomy by the end of 2021. Companies will be required to disclose in 2022.
The report also provides summary tables with a detailed description of which economic activities are included in the Taxonomy and have technical screenings criteria.
The full report, with more details and examples, can be accessed here.
Image by S. Hermann & F. Richter from Pixabay
