Before the pandemic forced a shift in focus, sustainable investment and the EU’s green agenda was one of the most discussed topics in financial services – and fast becoming an area of fundamental focus for governments and regulatory bodies.
To meet climate targets and transition to an environmentally sustainable economic model, the European Commission had indicated that the EU faced an investment gap. Attracting private capital to the activities that have the highest impact on climate was considered key. It stated: “A shift of capital flows towards more sustainable economic activities has to be underpinned by a shared understanding of what ‘sustainable’ means. A unified EU classification system – or taxonomy – will provide clarity on which activities can be considered ‘sustainable’. It is at this stage the most important and urgent action of this action plan.”
In other words, you cannot mobilise investments towards a greening of the EU before you understand what is green and what is not. This set the scene for a vast and ambitious initiative – to create a way to assess activities and determine whether they are environmentally sustainable.
Political agreement has since been reached on the wording of a regulation on the establishment of a framework to facilitate sustainable investment – the taxonomy regulation. This is making its way through the European Parliament and is expected to come into force in the summer. The regulation sets out the criteria that needs to be met before an activity can be considered “environmentally sustainable”. It must contribute substantially to one or more environmental objectives or be an enabling activity (‘E’), it must do no significant harm to any environmental objective (‘DNSH’), it must be carried out in compliance with certain minimum social safeguards (‘S’), and it must comply with technical screening criteria.
These are yet to be developed, but will effectively define what it means to “substantially contribute” and “DNSH” to an environmental objective, with the first criteria expected to cover the most urgent environmental objectives: climate change mitigation and climate change adaptation.
The overall regime will require fund managers (among others) to disclose information, including on how and to what extent the investments in their funds support economic activities that meet the criteria for environmental sustainability. And for funds that do not invest in taxonomy-compliant activities, they will essentially need to state that the relevant investments do not take into account the taxonomy regulation.
The EU and member states will have to apply the taxonomy when they adopt measures setting out requirements for financial products or bonds made available as environmentally sustainable. And certain large companies will be subject to related disclosure requirements. However, significant questions remain. Notably, the Commission says an extra €260 billion in investments is needed per year to finance the EU’s green agenda – but it is clear that none of the initiatives announced so far will be sufficient to “move the needle” on that.
Last December, Commission president Ursula von der Leyen described the EU’s Green Deal as “Europe’s man-on-the-moon moment”. The taxonomy regulation will represent a step towards that. Whether it is too little too late remains to be seen.
By Tamara Cizeika, Counsel at Allen & Overy
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