The final EU Taxonomy and next steps in sustainable finance

The European Commission has adopted its final screening criteria under the EU taxonomy, a framework for classifying green investments. Nordea's experts share their reflections on the landmark rules and what to focus on in sustainable finance going forward.

The European Commission has issued its final rules for what counts as a sustainable investment, capping off years of rigorous, science-based work and laying the foundation for significant regulatory and policy developments ahead.

The EU taxonomy is the centrepiece of the EU Action Plan on Sustainable Finance and marks the first attempt by a leading policy-maker to create a uniform classification system for green investments. The shared vetting tool aims to divert capital to more sustainable activities, increase transparency and stamp out “greenwashing.”

Six environmental objectives of the EU taxonomy

  1. Climate change mitigation
  2. Climate change adaptation
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy, waste prevention and recycling
  5. Pollution prevention and control
  6. Protection of healthy ecosystems

Source: EU TEG on Sustainable Finance, Taxonomy Technical Report, June 2019

To be considered environmentally sustainable, an activity must substantially contribute to at least one of six environmental objectives (see the adjacent box) and not significantly harm any of them.

While the level 1 taxonomy framework entered into force in July 2020, the Commission on 21 April 2021 adopted its level 2 legislation, or “delegated acts,” defining the technical screening criteria for the first two objectives: climate change mitigation and adaptation.

“The taxonomy is a tremendous body of work, both in terms of science-based thinking and market-focused application, all done on an impressive timeline,” says Jacob Michaelsen, head of Nordea’s Sustainable Finance Advisory team.

The taxonomy is a tremendous body of work, both in terms of science-based thinking and market-focused application, all done on an impressive timeline.

Jacob Michaelsen, Head of Nordea Sustainable Finance Advisory

Political tug-of-war

The process turned fiercely political last year, with one open consultation garnering over 45,000 responses, and the delegated acts, originally slated for adoption by the end of 2020, were delayed. A key battleground has been the energy criteria, with various industry bodies and member states lobbying for the inclusion of certain technologies, including natural gas and nuclear energy. As a consequence, several members of the Platform on Sustainable Finance, the Commission’s advisory body that last year took over from the original Technical Expert Group (TEG), threatened to leave.

EU countries are split on the issue. On 20 April, eight heads of government, including from Poland, Hungary and the Czech Republic, urged the Commission to postpone the rules until it could address all energy technologies. That came less than a week after seven other countries, including Germany, Denmark and Spain, had urged Brussels not to delay the rules.

Amid the uproar, the Commission chose to delay its decision on whether to include the controversial technologies and will later adopt a complementary delegated act of the EU Taxonomy Regulation, covering activities such as agriculture, certain energy sectors and certain manufacturing activities.

What comes next?

Marco Kisic, head of ESG Research at Nordea, welcomed the adoption of the final rules, saying they would provide “much needed clarity” for both investors and companies, which face time pressure in adapting to the new rules.

Marco Kisic. Head of ESG Research, Nordea Markets

Marco Kisic. Head of ESG Research, Nordea Markets

Article 8 of the taxonomy requires both financial and non-financial organisations covered by the Non-financial Reporting Directive (NFRD) to disclose how and to what extent their business activities are aligned with the taxonomy, starting in 2022. Market participants will get more insight into what they specifically need to disclose in June when the Commission adopts its level 2 Delegated Act for Article 8.

There will be a final opportunity to give input on the Article 8 disclosure requirements as the Commission is expected to run a short public consultation, ahead of their adoption by June. This will build on the earlier advice given to the Commission by the European Supervisory Authorities (ESAs).

“This is one of the first really big use cases for the taxonomy and will prompt a lot of data-intensive work for disclosing entities in a short space of time,” says Tim Farrar, Head of Public Affairs at Nordea Large Corporates & Institutions.

Nordea’s experts add that they will be keeping an eye on the upcoming consultation on the remaining environmental objectives (items 3-6 in the box above), and other work of the Platform.

“It will be interesting to see if there’s any mention of social or ‘brown’ categories,” says Michaelsen. The Platform has been tasked with advising on the remaining environmental objectives, “including social objectives and activities that significantly harm the environment.”

Disclosure under Article 8 is one of the first really big use cases for the taxonomy and will prompt a lot of data-intensive work for disclosing entities in a short space of time.

Tim Farrar, Head of Public Affairs at Nordea Large Corporates & Institutions

Also on the sustainable finance horizon

Michaelsen emphasises that, while the taxonomy is now final for climate change mitigation and adaptation, it is also just the beginning.

Jacob Michaelsen, Head of Nordea Sustainable Finance Advisory

Jacob Michaelsen, Head of Nordea Sustainable Finance Advisory

“It will be crucial to see how this cornerstone of the EU Action Plan plays together with all of the interlinked regulatory and policy work, and how this is viewed beyond Europe,” he says.

Here’s a brief snapshot of some of the related sustainable finance regulatory developments to watch:

Sustainable Finance Disclosure Regulation (SFDR)

The SFDR imposes new transparency and disclosure requirements on financial market participants and financial advisers at both the product and entity level. SFDR is already in application, however, key outstanding level 2 measures (Regulatory Technical Standards, or RTS), as published by the ESAs in February, are expected to be adopted in the coming month(s), and to enter into force by 1 January 2022. The RTS will, for example, specify the indicators to be used to assess the Principal Adverse Impact (PAI) of investment decisions on sustainability factors and the templates for product-disclosures.

Non-financial Reporting Directive (NFRD)

On 21 April, the European Commission also released the Corporate Sustainability Reporting Directive (CSRD), a legislative proposal that will revise the rules under the NFRD, which requires large companies to publish regular reports on the social and environmental impacts of their activities.

EU Green Bond Standard (GBS)

In some circles, focus will now shift to the EU GBS, the first official green bond standard that’s linked to the taxonomy. The European Commission is set to launch its proposal in June, on the back of the public market consultation from last year.

“It will be key to see if the Commission plans to water down the thresholds for 100% use-of-proceeds alignment with taxonomy,” says Michaelsen, adding that he expects and hopes not.

EU’s Renewed Sustainable Finance Strategy

Tim Farrar, Head of Public Affairs, Nordea Large Corporates & Institutions

Tim Farrar, Head of Public Affairs, Nordea Large Corporates & Institutions

The European Commission is also set to release a renewed sustainable finance strategy in June, following a consultation last year. That consultation covered a wide range of topics, from future development of the taxonomy, addressing data gaps as well as further work on integrating ESG risks.

“We expect the renewed plan to stick largely to what was covered in last year’s consultation, with some areas, like the need to define harmful activities, already being looked at by the Platform,” says Farrar.

Sustainable Corporate Governance

The European Commission will adopt a proposal for a directive which aims to improve the EU regulatory framework on company law and corporate governance. As stated by the Commission, it aims to enable companies to focus on long-term sustainable value creation rather than short-term benefits. This proposal follows an earlier consultation by the Commission.

A sustainable finance regulation timeline (subject to change)

2021 Q2

European Commission (EC) adopts first Taxonomy delegated act on climate change adaptation and mitigation (21 April)

EC issues Corporate Sustainability Reporting Directive, its legislative proposal for the revision of the Non-Financial Reporting Directive (21 April)

EC to issue Article 8 Taxonomy disclosures consultation (April)

EC proposal on revised EU Emissions Trading System (ETS)

EC proposal on a Carbon Border Adjustment Mechanism (CBAM)

EC to launch EU Green Bond Standard proposal (June)

EC to launch Sustainable Corporate Governance proposal (June)

EC to launch Renewed Sustainable Finance Strategy (June)

EC to adopt delegated act on Article 8 Taxonomy disclosures (by 1 June 2021)

2022 Q1

Taxonomy regulation starts to apply 1 Jan 2022 for climate change mitigation and adaptation

2023 Q1

Taxonomy regulation to apply 1 Jan 2023 for remaining 4 objectives




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