ESG insight: the EU taxonomy proposal

Video | August 2019 | 6:09

Video Details

ESG insight: the EU taxonomy proposal
Simon Lovegrove

Hello everyone, and welcome to our latest Financial Services video on ESG. In our previous videos, we have looked at the Commission’s Action Plan on Sustainable Finance. This is three key measures: the Regulation on low carbon benchmarks; the Regulation on disclosures; and a proposal on a so-called taxonomy.

Beth, to begin with, can you briefly tell us what the taxonomy is and the current state of play on the negotiations?

Beth Duff

Exactly, so as you say, that’s one element of this broader package. The objective of the taxonomy is to provide investors with a unified classification system, against which to measure the degree of sustainability of their investment. 

Now, the Commission has really tried to emphasize this is not a label. The sustainability label is something for further down the line. But it is to allow the ultimate investor to compare investments. As to the status: so, the European Parliament and the Council of the EU, meaning the member states, began to review in parallel. The European Parliament was able to reach an approach in March of this year; however the member states are still negotiating. 

In July of this year Finland took over the Presidency of the Council, and they have committed to finalizing the negotiations by the end of 2019. Should that be possible, Norton Rose Fulbright would anticipate that the first requirements would probably apply around Q2/Q3 2021.

Simon Lovegrove And on the taxonomy itself, the first thing that firms will be asking is scope: who is inside and who is outside the scope of the Regulation. Can you tell us a little bit more?
Beth Duff

The scope of the taxonomy is aligned with that of the Disclosure Regulation, which we’ve covered in more detail in one of the previous videos. Meaning that it applies to financial market participants, and quite a broad scope of participants, including investment firms and credit institutions as far as they provide portfolio management, UCITS management companies, AIF managers and pension product manufacturers. 

What’s quite important to point out, is that the taxonomy only applies to those participants when they are offering financial products which are offered as environmentally sustainable. However, another point to note is that the European Parliament, whilst it was reviewing the text, decided that the scope should be extended to all financial products, regardless of how they are offered. The member states have not mirrored that approach during their negotiations, but there is still potential that that extended scope would feature in the final Regulation. 

Simon Lovegrove Beth, we have recently seen a very chunky report (over 400 pages) from the Commission’s expert group on sustainable finance that sets out the granular detail, really, of what is considered to be environmentally sustainable. I know you have been looking at the report, what are the headlines for you?
Beth Duff So as you say, the Commission established this technical expert group to develop criteria for determining which economic activities could be considered environmentally sustainable. This lengthy report identifies over 60 economic activities which have the potential to be environmentally sustainable.
Simon Lovegrove And the granular, technical criteria in the report; that’s going to ultimately become a level two measure?
Beth Duff Indeed. So in the proposal at the moment, the technical screening criteria will be in a Delegated Act, so a level two measure. Meaning legally binding, however it should be noted that member states are currently negotiating that as some member states are more in favour of non-binding guidelines that would allow some flexibility. So, within the negotiations over the next few months or weeks, that point will be resolved.
Simon Lovegrove  I know you have been doing a lot of work on the report, what are some of the issues that you are going to be looking at?
Beth Duff Some of the issues which we are looking into in a bit more detail are firstly; how we take into consideration client preferences when determining the environmental sustainability of an investment, and secondly; as the environmental sustainability of an activity can fluctuate, does that mean that the disclosure requirements of the financial market participant is also a continual monitoring and updating process.
Simon Lovegrove Thanks Beth, that’s really interesting. That concludes this Financial Services video. Further information on the Commission’s Action Plan on Sustainable Finance can be found on our ESG insight page, which is on our asset management regulation hub, found on the Norton Rose Fulbright Institute. Goodbye.