SFDR level 2 product requirements have been broadened to include EU taxonomy alignment measures. Both the Taxonomy Regulation and the SFDR have enormous scope and application, covering more or less the entire asset management industry and beyond. to this end, the taxonomy regulation provides criteria to allow companies and financial market participants to label specific economic activities and related investments as "environmentally sustainable," and eu rules require a growing number of companies and investors to report on the degree to which their economic activities and investments For example, the forthcoming EU proposal for an EU Green Bond Standard is expected to use the Taxonomy as the benchmark for eligibility. Introduction. [9] Non-Financial Reporting Directive 2014 (2014/95/EU). Download this article - PDF Where a financial product as referred to in Article 8(1) of Regulation (EU) 2019/2088 promotes environmental characteristics, Article 5 of this Regulation shall apply mutatis mutandis. Specifically, Article 18 defines these safeguards as procedures that must be implemented by the entity under consideration and which must align with the following international rule sets: In terms of the final bullet, particular emphasis is placed on compliance with the International Labour Organization Declaration's Eight Fundamental Conventions, as set out therein. Its not panic stations yet, but its definitely action stations given that the first key deadlines under the new regime (specifically the SFDR) are set for March 10, 2021, less the eight months away. Share this page: In addition, the Taxonomy Regulation will impose additional pre-contractual . The Taxonomy Regulation tasks the Commission with establishing the actual list of environmentally sustainable activities by defining technical screening criteria for each environmental objective through delegated acts. The EU Commission published on 6 October 2022 the updated FAQs to clarify the content of the Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 (the "Disclosures Delegated Regulation") under Article 8 of Regulation (EU) 2020/852 of 18 June 2020 (the "Taxonomy Regulation") to assist with its implementation.Article 8 of the Taxonomy Regulation applies to undertakings which are subject . The disclosure will cover how and to what extent the investments underlying the financial product are in economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. The firm needs to feed the analysis into the SFDR disclosures by way of Articles 5 and 6 of the Taxonomy Regulation, which is the principal mechanism through which the regulation makes its presence felt in the world: In many respects, the Taxonomy can be regarded as a very elaborate set of marketing rules. The EU Taxonomy Regulation sets out an EU-wide framework (a classification system known as a "taxonomy") according to which investors and businesses can assess whether certain economic activities are "environmentally sustainable". The Disclosures Delegated Act specifies the content, methodology and presentation of information to be disclosed by both financial and non-financial . Therefore, these requirements will not form part of retained EU law in the UK unless the UK incorporates them into domestic legislation. The UK government has explained that it cannot comment at this stage on the extent to which the UK will align with the EU on this regulation after the end of the transition period because the delegated legislation containing technical standards has not yet been published by the European Commission, meaning that the UK does not have clarity as to the exact requirements that it would be agreeing to. In short, these bodies signaled that they saw the existential threat to their operations posed by the Taxonomy Regulation and were determined to meet it head on. What are the key considerations for asset managers? The Taxonomy Regulation empowers the Commission to adopt delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in the directive. 5 Taxonomy Regulation financial products) climate change mitigation and/or climate change adaptation. The tool allows users to navigate easily through the contents of the Climate Delegated Act. For more information on the Taxonomy Regulation, see here. At present, there is a gap between the data disclosed pursuant to the NFRD and the data required by the SFDR and Taxonomy Regulation. 8 SFDR / Art. Such a peculiar naming convention is not uncommon within the EU however, as the European Markets Infrastructure Regulation (EMIR) attests (with its official title being Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories). June 18, 2020: The EU has adopted the Taxonomy Regulation 2020/852 which amends (parts of) the SFDR regulation; and; . By Philippa List; Mikhaelle Schiappacasse, Dechert LLP. detailed information on how those characteristics are met. The EUs new Taxonomy Regulation is designed to support the transformation of the EU economy to meet its European Green Deal objectives, including the 2050 climate-neutrality target. A second delegated act on the other four environmental objectives of the EU Taxonomy will be adopted in2022. However, on June 18, 2020, the presidents of the European Council and Parliament announced that they had signed the EU Taxonomy Regulation into law, which was published in the EUs Official Journal just four days later, heralding a new era of financial regulation. Brought to you by Lexparency.org. Regulatory stories dominating the conversation in May 2022. On 9December2021, a first delegated act on sustainable activities for climate change mitigation and adaptation objectives of the EU Taxonomy (Climate Delegated Act) was published in the Official Journal. from 1 January 2023 in respect of the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystem. It represents a key step towards the EU's objective of achieving a climate neutral union by 2050. Product-level disclosures centre around the following areas for products covered by Articles 6, 8 and 9: . What is the EU taxonomy? At the core of the Taxonomy Regulation is the definition of a sustainable economic activity. An Article 6 fund which looks to reclassify, will need to be prepared for the level of ESG reporting disclosures required by an Article 8 fund. The Taxonomy Regulation contemplates a phased implementation, with certain rules set to apply from different dates:[14]. [10]. Frequently asked questions: What is the EUtaxonomy Article8 delegated act and how will it work in practice? 8 SFDR products). The Taxonomy Regulation contemplates that asset managers will use the technical screening criteria to assess a companys economic activities and determine whether each activity does or does not meet the taxonomy criteria then aggregate the percentage of taxonomy alignment at investment and product level. Similarly, a few weeks later, the U.S. Department of Labor went further, proposing a rule that would legally oblige fiduciaries to focus on returns over ESG considerations in a measure that, if adopted, would collide head-on with consensus (but not universal) jurisprudence that consideration of ESG factors is also a fundamental obligation of a fiduciary. in Taxonomy Taxonomy objective(s) to which the product contributes % investments in Taxonomy activities % of enabling and transitional activities Where to disclose Existing periodic reporting documents (e.g. For example, (i) a non-EU manager that has a structure that incorporates a UCITS may need to assist the UCITS ManCo with making disclosures by providing the ManCo with certain information relating to environmental sustainability, and some of these disclosures will need to consider the framework taxonomy or (ii) a non-EU manager marketing its funds in the EEA under Article 23 of AIFMD will need to consider the framework taxonomy when making certain sustainability disclosures. Article 6 Transparency of financial products that promote environmental characteristics in pre-contractual disclosures and in periodic reports Where a financial product as referred to in Article 8 (1) of Regulation (EU) 2019/2088 promotes environmental characteristics, Article 5 of this Regulation shall apply mutatis mutandis. The Taxonomy entered into force on 12 July 2020. Unconstrained by the EU legislative process, they may succeed in winning the race. In relation to the disclosures required under Articles 5 and 6 of the Taxonomy Regulation (requiring in-scope funds to disclose the extent to which underlying investments are in environmentally sustainable economic activities), the ESAs expect that during the interim period FMPs will provide an "explicit For an activity pursuing one or more of the six objectives to qualify as sustainable it cannot cause significant harm to any of the other Taxonomy objectives. This legislation takes action to tackle greenwashing in European markets and beyond. Moreover, its formal legitimacy, compared with the voluntary nature of other regimes, is likely to draw appetite from investors outside of the EU who are seeking reassurance (including from their clients) that their investments are genuinely sustainable rather than greenwashed. Under the current timetable, as set out in Article 26(2) of the Taxonomy Regulation, the European Commission will report on proposals for a broader ESG taxonomy by December 31, 2021. It makes a "substantial contribution" to at least one of the six following specified environmental objectives (also known as the 6 EU Taxonomy objectives) : Climate change mitigation Climate change adaptation Sustainable use and protection of water and marine resources Transition to a circular economy Pollution prevention and control Any undertaking subject to the NFRD needs to disclose how, and to what extent, its activities are associated with activities that are considered as environmentally sustainable. Technical Screening Criteria (TSC) define the specific requirements and thresholds for an activity to be considered as significantly contributing to a sustainability objective. Article 3: Environmentally Sustainable Economic Activities. The Ecolabel is expected to be finalised by the end of 2021. Regulation (EU) 2020/852 of the European Parliament and EU Council (the 'Taxonomy Regulation') came into force on 12 July 2020, although it will not start applying until 1 January 2022 at the earliest. Speed read - As the start date looms for the Regulatory Technical Standards (RTS) under SFDR and the product disclosure regime in the Taxonomy Regulation, firms are progressing their. Back in February this year, the ESAs published a final report on draft level 2 RTS with regard to the content, methodologies and presentation of disclosures under the SFDR (" Draft SFDR RTS " - JC 2021 03). Corporate The delegated act is applicable from 1January2022. This identified six environmental objectives, which an economic activity must adhere to, to be included in the EU Taxonomy. Article 5 of the Taxonomy Regulation. The Regulation foresees future development, with the European Commission required to come forward with a report by end 2021 to explore potential expansion. Background:Article 10(3) and Article 11(3) of the Taxonomy Regulation require the Commission to establish technical screening criteria6to determine the conditions under which certain economic activities qualify as contributing substantially to climate change mitigation and adaptation, the first two environmental objectives. It is also adopting standardized processes through its Sustainable Finance Disclosure Regulation(SFDR). Information about the Regulation (EU) 2020/852 (Taxonomy) on the establishment of a framework to facilitate sustainable investment. Do no significant harm to any of the other objectives, while respecting basic human rights and labour standards. The Taxonomy Regulation is notably focused on the environmental aspects of ESG. As a piece of EU legislation, its impact will be felt in the EU by entities such as AIFMs, UCITS management companies, investment firms authorised under MiFID II that provide portfolio management or investment advice, and these entities will need to ensure that they use the framework taxonomy when making disclosures (including, but not limited to, in prospectuses, portfolio management agreements, annual reports, non-financial statements, and on websites). Article 8 are funds integrating ESG considerations but more focused on financial outcomes, while Article 9 funds are more focused on sustainable economic activities, such as reducing carbon emissions in line with the Paris Agreement. MSCI's proposed approach to the key SFDR distinctions are based on assumptions and client feedback as explained in The Taxonomy Regulation empowers the Commission to adopt delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in the directive. The Taxonomy Regulation also introduces new disclosures for corporates subject to the NFRD. The draft report prepared by the dedicated Platform subgroup, the Technical Working Group (TWG), is an important step in the Platform's main mandate under the Taxonomy Regulation to advise the Commission on the development of the EU taxonomy, and in particular on the development of technical screening criteria (TSC) for the 6 environmental objectives as set out in the Taxonomy Regulation. Its aims include: It avoids violation of minimum social safeguards (i.e., avoids adverse social impacts). This means funds that neither have a sustainable investment objective, nor do they embrace investment in assets with environmental or social benefits. ESG - EU Taxonomy Regulation - 6 Months To Go. Given the size of the EU market, and because the taxonomy is the most comprehensive attempt yet to set regulatory standards for ESG, the taxonomy may also influence ESG disclosures and practices outside of the EU. around the approach for Article 6, 8 and 9 products under the EU Sustainable Finance Disclosure Regulation (SFDR). Social and governance factors also feature in the new Taxonomy Regulation, but only as a component (rather than as a principal focus) of the regime, which is dedicated to environmental considerations. As a classification system, the Taxonomy was created to address greenwashing by enabling market participants to identify and invest in sustainable assets with more confidence. However, the Regulation also places new Taxonomy linked disclosure obligations on companies and on financial market participants. This is not the only quirk of Article 18 either, which is also notable for requiring the entity under evaluation to comply with the do no significant harm (DNSH) principle in Article 2(17) of the SFDR, which in itself is uncontentious, but does draw attention to the link (or lack thereof) between the SFDR DNSH principle in Article 2(17) of the SFDR and the similar principle in Article 17 of the Taxonomy Regulation, which applies to the Article 9 Environmental Objectives. The Taxonomy Regulation provides uniform criteria for companies and investors to determine whether an economic activity is "environmentally sustainable". periodic report Art. The 6 EU environmental objectives laid by the Taxonomy Regulation lays are: [13] climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, The delegated act specifies the content and presentation of information to be disclosed by undertakings subject to Article 19a or 29a of Directive 2013/34/EU (Accounting Directive) concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation. The Taxonomy Regulation ( Regulation (EU) 2020/852 of 18 June 2020) is an essential component of the European Commission's "Action Plan: Financing Sustainable Growth" of March 2018. On 6 July 2021 the European Commission adopted various measures relating to sustainable finance, including a new Sustainable Finance Strategy. The first delegated Act concerned climate change adaptation and mitigation objectives. Specifically, Article 8 requires entities subject to the NFRD to disclose in their non-financial statements information on how and to what extent their activities are associated with environmentally sustainable economic activities under Articles 3 and 9 of the [Taxonomy Regulation] including: The European Commission is required to adopt a Delegated Act by June 1, 2021, specifying the content and presentation of the information to be disclosed and the methodology used, taking into account the specificities of both financial and non-financial undertakings and the technical screening criteria established under the Taxonomy Regulation. [12] the European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority, European Supervisory Authorities (collectively, the ESAs). Financial market participants (primarily buy-side firms and institutional investors) offer . Since it will have the force of law and since no other legal frameworks are being developed to compete with it, the EU framework will become the de facto global ESG (gold) standard. Sustainable Finance Disclosure Regulation, The Sustainable Finance Disclosure Regulation, The OECD Guidelines for Multinational Enterprises, The UN Guiding Principles on Business and Human Rights, The Declaration on Fundamental Rights and Principles at Work, International Labour Organization Declaration's Eight Fundamental Conventions. Following recent statements made by the head of the sustainable finance and financial technology unit at the European Commission, it seems that there is a move to explore whether the Taxonomy Regulation should be extended to cover social issues as well as a wider range of environmental factors ahead of the publication of a new sustainable finance action plan next year. Like any classification system, it has definitions and rules. How are sustainable economic activities defined? This is a significant departure from how the industry had generally been interpreting the Article 3 Criteria for environmentally sustainable economic activities, Article 4 Use of the criteria for environmentally sustainable economic activities in public measures, in standards and in labels, Article 5 Transparency of environmentally sustainable investments in pre-contractual disclosures and in periodic reports, Article 6 Transparency of financial products that promote environmental characteristics in pre-contractual disclosures and in periodic reports, Article 7 Transparency of other financial products in pre-contractual disclosures and in periodic reports, Article 8 Transparency of undertakings in non-financial statements, Article 10 Substantial contribution to climate change mitigation, Article 11 Substantial contribution to climate change adaptation, Article 12 Substantial contribution to the sustainable use and protection of water and marine resources, Article 13 Substantial contribution to the transition to a circular economy, Article 14 Substantial contribution to pollution prevention and control, Article 15 Substantial contribution to the protection and restoration of biodiversity and ecosystems, Article 17 Significant harm to environmental objectives, Article 19 Requirements for technical screening criteria, Article 20 Platform on Sustainable Finance, Article 24 Member State Expert Group on Sustainable Finance, Article 25 Amendments to Regulation (EU) 2019/2088, Article 27 Entry into force and application.

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