As indicated in the European Commission’s Action Plan on financing sustainable growth, issued in March 2018, the lack of a clear definition of “environmentally-sustainable economic activities” presents one of the biggest obstacles to the European Union in financing its green deal and 2050 climate neutral target.
With this in mind, on July 12, the EU taxonomy regulation entered into force with the objective of setting performance thresholds to be able to categorise environmentally-sustainable economic activities.
The EU taxonomy regulation is targeted towards three financial stakeholders: (i) financial market participants; (ii) large companies that are already required to provide a non-financial statement under the Non-Financial Reporting Directive (NFRD); and (iii) EU members states keen on issuing labels on green financial products or issuing green bonds.
The EU taxonomy regulation will apply in two stages, as of January 1, 2022, for the first two environmental objectives – climate change mitigation and adaptation; and as of January 1, 2023, for the remaining four environmental objectives ‒ water, circular economy, pollution prevention and biodiversity.
Such an EU-wide classification system for environmentally-sustainable economic activities will be developed through the European Commission issuing two delegated acts following extensive consultation with all relevant stakeholders. To assist the European Commission in the development of these delegated acts, a Platform for Sustainable Finance gathering various experts and stakeholders will be created, tasked with providing advice on the EU taxonomy technical screening criteria.
The lack of a clear definition of ‘environmentally sustainable economic activities’ presents one of the biggest obstacles to the EU in financing its green deal
The first delegated act will define the technical criteria for activities that substantially contribute to climate change mitigation and adaptation, while not causing significant harm to any of the other EU’s environmental objectives, and will be issued by the end of 2020. The second delegated act will define the technical criteria for activities that substantially contribute to water, circular economy, pollution prevention and biodiversity by the end of 2021.
In parallel, the European Commission is currently reviewing the non-financial reporting directive (NFRD) in line with its December 2019 communication on the European Green Deal. The non-financial reporting directive requires certain large public interest companies (large listed undertakings, large banks and large insurance undertakings with more than 500 employees) to disclose information on the way they operate and manage social and environmental challenges.
The taxonomy regulation also requires all companies preparing non-financial statements under the NFRD to publish information on how and to what extent their activities are associated with environmentally-sustainable economic activities under the EU taxonomy regulation.
This would include classifying the proportion of (i) turnover generated; and (ii) capital and operational expenditure linked to activities that substantially contribute, while doing no harm, to the six environmental objectives in the taxonomy regulation. The above reporting obligations are to be implemented via a third delegated act which is expected to be adopted by the EU Commission in June 2021.
Implementing these multiple reporting obligations in a standardised format will be challenging on financial market participants. However, cumulatively, these initiatives will improve transparency in capital markets to create the required impetus to guide investors, large undertakings and financial intermediaries to enhance capital flows towards environmentally-sustainable projects. This will assist European capital markets raise the required green financing to steer Europe towards a greener economic recovery post-COVID-19.
Mark Scicluna Bartoli also sits on the Board of the European Investment Fund and is a member of the European Commission’s Mission Board on adaptation to climate change. Any views, assumptions or opinions expressed in this article are those of the author.
Mark Scicluna Bartoli, Head, Bank of Valletta EU and Institutional Affairs section