In the ever-evolving landscape of sustainable finance, the European Green Taxonomy stands as a pivotal framework within the broader context of the European Green Deal. For investment firms, understanding and effectively navigating the complexities of EU Green Taxonomy reporting is not just a regulatory obligation but a strategic imperative. In this article, we delve into ten essential questions that investment firms must address to report on the EU Green Taxonomy with confidence, exploring its significance, disclosure requirements, and the broader implications for sustainable investment strategies.
1. Why should I care about the European Green Taxonomy?
The EU Green Taxonomy is an integral component of the European Green Deal, which provides a common definition of a “sustainable” activity regarding six environmental critical objectives:
- Mitigation of climate change,
- Adaptation to climate change,
- Sustainable use and protection of aquatic and maritime resources,
- Transition to a circular economy,
- Pollution prevention and control,
- Protection and restoration of biodiversity and ecosystems.
In the future, the European Green Taxonomy will be a common language, essential for communicating about the virtuous impacts of a business model on the environment. Furthermore, these definitions of sustainable activities are a significant step forward in the fight against greenwashing.
Although it may seem complex and overwhelming and there have been controversies with some of the sectors it included, Taxonomy remains a perfectible framework that should not be seen as just another time-consuming regulation. At the fund level, the EU Green Taxonomy contributes to highlighting the sustainable investment strategy of your fund. Being able to communicate a share of alignment at the fund level is recognized and valued by stakeholders, including investors, and may even increase the financial value of your assets.
Furthermore, it will enable you to support your portfolio companies in meeting their own regulatory obligations (see question 8) and identify opportunities for transitioning their business model.
2. Do I have to publish my fund’s share of eligibility and alignment?
An activity is eligible for the Taxonomy if it corresponds to the description of the activity provided in the annexes of the Environmental and Climate Delegated Acts of the EU Green Taxonomy.
An activity is aligned with Taxonomy if it meets all 3 following criteria:
- Have a substantial positive contribution to one of the 6 environmental objectives defined by the European Commission
- Do No Significantly Harm (DNSH) one of the 5 other objectives.
- Respect minimum social safeguards (referring to OECD, UN labor law texts, ILO Declaration and International Bill of Human Rights)
The ESMA (European Securities and Markets Authority) has identified several scenarios:
- If there are SFDR Article 9 funds, or SFDR Article 8 funds with environmental characteristics in the portfolio, you must disclose information on your alignment with the EU Green Taxonomy
- If there are SFDR Article 6 funds, or SFDR Article 8 funds with social characteristics in the portfolio, disclosure on Taxonomy is not mandatory.
Nonetheless, these products will have to warn in their periodic report to their clients that “the investment underlying this financial product does not take into account the EU criteria for environmentally sustainable investments”.
3. Which objectives should I report on and when?
In addition to the first two objectives (Mitigation of climate change and Adaptation to climate change) that were released in 2020, in April 2023, the EU Commission released the last 4 objectives of the Taxonomy with their list of eligible activities and corresponding alignment criteria (Sustainable use and protection of aquatic and maritime resources, Transition to a circular economy, Pollution prevention and control, Protection and restoration of biodiversity and ecosystems).
This update led to the following disclosure calendar for financial products¹:
- For now, only the first two objectives were subject to reporting eligibility and alignment assessment.
- Starting in 2024 and based on 2023 data, financial actors should now report on the alignment of their financial products for all 6 objectives.
4. What should I disclose specifically?
Financial products should disclose 2 types of information:
– Quantitative information:
- The share of eligible assets (turnover, CapEx & OpEx)
- The share of alignment of eligible assets (turnover, CapEx & OpEx)
- The share of aligned assets (Green Asset Ratio) for their turnover, CapEx & OpEx
Formula: Taxonomy-aligned assets/Total covered assets weighted by the invested amounts of each portfolio company (whether eligible or not).
- The share of alignment to fossil gas and nuclear for the 3 points mentioned above
- The share of alignment to enabling and transitional activities
– Qualitative information
In addition, a narrative communication detailing the nature and objectives of aligned activities, scope of assets and activities covered by KPIs, strategic objectives and stakeholders’ engagement regarding Taxonomy…must be disclosed.
5. I already disclosed information about Taxonomy in my SFDR periodic disclosure. Do I have to publish anything else?
Information on the EU Green Taxonomy must be published periodically by the fund for its clients. This publication can therefore be included in the SFDR periodic template or in another annual fund report shared with customers.
In addition, if the fund is subject to the French regulatory authority and has a balance sheet or assets under management of at least €500 million, it is required to disclose information related to the European Green Taxonomy under Article 29 of the Energy Climate Law (part 5). Therefore, investment firms will have to publish their fund’s share of eligibility and alignment in Article 29 dedicated document and make it available on the ADEME Climate Transparency Hub.
6. What should I do if I don’t calculate my share of alignment with the Taxonomy?
If the alignment with the EU Green Taxonomy cannot be calculated, you should report that 0% of your fund is aligned with the Taxonomy. In fact, to date, the EU Green Taxonomy has resulted in a disclosure obligation rather than a minimum alignment obligation.
When mandatory, not reporting at all with the EU Green Taxonomy will lead to a lack of regulatory compliance for your fund (see question 2).
7. What are the sanctions if I do not comply with the EU Green Taxonomy?
The European Commission has not formalized sanctions for funds if they fail to comply with the Taxonomy. However, sanctions for corporate companies may be introduced as part of the deployment of the CSRD at national levels.
On the other hand, not reporting on EU Green Taxonomy may result in reputational risks, investor skepticism, and a potential loss of opportunities to attract green-focused investors.
8. What is the link between CSRD and EU Green Taxonomy?
With the implementation of the CSRD (Corporate Sustainability Reporting Disclosure), a larger number of companies will fall under the reporting requirements of the Green Taxonomy, thus broadening its scope and impact. European companies meeting 2 of the 3 following criteria: >250 employees, >20M€ balance sheet, >40M€ of turnover will be subject to the CSRD and will have to report about the EU Green Taxonomy starting in 2025.
To find out more about the CSRD, please refer to our article: How the Corporate Sustainability Reporting Directive (CSRD) will Change Reporting as We Know It
We are also hosting a webinar on ‘Implementing CSRD & ESRS: how to prepare‘. Join us below to learn the latest insights on the implications of the Corporate Sustainability Reporting Directive (CSRD) for companies, and what you can do to prepare.
Around 50,000 companies in Europe will be required to report their alignment with the Green Taxonomy through the CSRD, thus, anticipating this obligation by supporting your portfolio companies in Taxonomy compliance is crucial. After implementing this regulation, investment firms will no longer be responsible for calculating the share of alignment at the asset level; instead, they will receive the information directly from the companies.
9. How can my institution effectively integrate the European Green Taxonomy into its overall sustainability and investment strategy?
The harmonization of the definition of green investment offered by the European Taxonomy now requires an activity to be aligned with the said Taxonomy to be considered environmentally sustainable. As a result, investors aiming to contribute to sustainability must measure the degree of sustainable investment, define objectives and support companies in their transition to sustainable development.
Furthermore, it is essential to keep in mind that not meeting the eligibility criteria for the Taxonomy does not necessarily categorize an investment as non-sustainable. Currently, the Taxonomy covers activities with the most significant impact across its six objectives (climate, pollution, circular economy, water, and biodiversity). However, the absence of eligibility implies that the invested asset’s activity is not listed as a sustainable activity in the Taxonomy. Nonetheless, this does not automatically imply that the invested asset’s activity lacks significant impact or should not be pursued.
On the other hand, a company that is eligible but not aligned with the Taxonomy due to non-respect with the technical review criteria has to define an action plan in order to meet these criteria, to be as “green” as possible.
Additionally, it’s worth noting that the EU’s Green Taxonomy provides a highly valuable framework for demonstrating the environmental impact of a fund or an activity. This is particularly relevant for impact funds. Integrating this framework into the definition of your investment strategy makes it much easier to report on environmental impact afterwards.
10. What support or resources are available to help me navigate the complexities of complying with the European Green Taxonomy disclosure requirements?
To keep up with the EU’s latest information release about the Green Taxonomy, you can regularly visit the European Commission’s official website dedicated page.
Additional useful resources:
FAQs repository: Users can search for specific questions that are of interest to them and filter the questions by organization type and FAQ document.
EU Green Taxonomy Compass: Online tool that enables users to search for economic activities covered in the Climate Delegated Act (therefore only covering the first two objectives of the Taxonomy) and directly access their respective technical screening criteria. The Taxonomy Compass’s content can be downloaded in Excel and JSON format.
EU Green Taxonomy Calculator: Interactive tool to show non-financial undertakings in a step-by-step guide on how to determine their Taxonomy eligibility and alignment ratios. The tool guides users through seven main steps to calculate their turnover, CapEx and OpEx KPIs and automatically fills in the respective reporting templates to the Taxonomy Disclosures Delegated Act. To date, only the first objective related to climate change mitigation 1 is available on this tool.
User guide: Step-by-step guide to help non-financial and financial undertakings assess their Taxonomy eligibility and alignment.
Cority’s resources library: Get the latest industry updates and learn more about the available sustainability and ESG and Sustainability Frameworks, Standards and Regulations to support your company’s reporting.
As we navigate the complexities of the EU Green Taxonomy, it becomes evident that embracing this framework goes beyond compliance—it is an opportunity to showcase commitment to sustainability, foster transparency, and enhance the value of assets. The alignment with the Taxonomy is not just a regulatory checkbox but a strategic move that resonates with stakeholders and investors alike. By addressing the questions posed in this article, investment firms can position themselves not only as compliant entities but as proactive contributors to the global sustainability agenda, ensuring a greener and more responsible financial landscape for the future.
1 Disclaimer: This information is based on our interpretation of the law. To date, the European Commission has not specified the publication schedule for financial products, however, within the SFDR periodic disclosure framework, the ESMA (European Securities and Market Authority) requires financial products to report on eligibility share, fund alignment, and investment share in enabling and transitional activities.