On December 17, 2019, the European Commission published the text of the proposed “regulation on the establishment of a framework to facilitate sustainable investment,” which is also known as the “Taxonomy Regulation.” This forms part of the EU’s sustainable finance reforms. More information is available in the May 10 edition of Corporate & Financial Weekly Digest and December 13 edition of Corporate & Financial Weekly Digest.
The purpose of the Taxonomy Regulation is to enable firms and investors to identify environmentally sustainable economic activities. It will apply to financial market participants who offer financial products, as well as companies to whom the Non-Financial Reporting Directive applies (generally, large, EU-listed public companies).
In order for an activity to be an “environmentally sustainable economic activity,” the activity must make a “substantial contribution” to at least one of six “environmental objectives.” The environmental objectives include:
- climate change mitigation;
- climate change adaptation;
- sustainable use and protection of water and marine resources;
- transition to a circular economy (e.g. recycling);
- pollution prevention and control; and
- protection and restoration of biodiversity and ecosystems.
Further requirements for an activity to be environmentally sustainable are that it must not “significantly harm” any of the other environmental objectives, it must meet the “minimum safeguards” (such as complying with the International Bill of Human Rights), and it must comply with any other criteria specified by the European Commission in delegated acts, which will be adopted between now and the end of 2022.
The Taxonomy Regulation will become effective 20 days after its publication in the Official Journal but will only apply once all of the delegated acts have become effective. It is currently expected that the first two climate-related environmental objectives will apply from December 31, 2021, and the four remaining objectives will apply from December 31, 2022.
The proposed Taxonomy Regulation is available here.