3 december, 2019

The taxonomy will, once it’s been approved, provide a common definition for activities that are “sustainable”. Under the proposed Taxonomy regulation, institutional investors and asset managers marketing investment products as environmentally sustainable would need to explain whether, and how, they have used the Taxonomy criteria.

“Taxonomy-compliant” activities are suggested to:Contribute to one of the following policy objectives: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy, waste prevention and recycling; pollution prevention and control; or protection of healthy ecosystems; Do no significant harm to any other environmental objective listed above; Comply with minimum social safeguards (i.e. ILO core labour conventions);
Comply with the technical screening criteria (to be established by the European Commission).

The final negotiations between the EU Commission and the EU Parliament to agree upon the content of the Taxonomy started in October 2019 and it should be adopted by the end of the year/ early 2020. Companies have six months to apply these criteria for environmentally sustainable economic activities.

Potential implications for companies

For now, the Taxonomy does not suggest a minimum threshold for the amount of sustainable activities that a portfolio or a company must have; this will be established by the Ecolabel for financial products. Companies that don’t report in line with the Taxonomy may be penalized by investors (asset managers and insurance companies) that will need to disclose market products labelled as being sustainable. The Taxonomy will probably also be used in the future in EU regulations and incentive mechanisms, pushing institutional investors to ask for taxonomy-related disclosure of companies they invest in.

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