The European Commission released three technical reports on 18 June to implement key areas of its sustainable finance action plan. The report on the future taxonomy of sustainable economic activities is particularly relevant from a risk management perspective. (See the previous FERMA article.)

Launched in 2018, the Commission’s sustainable finance action plan is meant to channel capital flows towards sustainable economic activities. As part of this process, the Commission issued in May 2018 a proposal for a regulatory framework for sustainable investment, also called the Taxonomy Regulation.

The report published in June sets out the basis for a future EU taxonomy in legislation. According to the Technical Expert Group (TEG) which produced the report, under the proposed Taxonomy Regulation institutional investors and asset managers that market investment products as environmentally sustainable will need to explain whether, and how, they have used the taxonomy criteria.

This common language is, therefore, likely to influence the comparative attractiveness of companies from a sustainability perspective for investors, issuers, policymakers and regulators. It is also expected to drive sustainable investment opportunities for businesses and help them in their decision making.

The taxonomy, the report stresses, is intended to be flexible and dynamic so that it remains useful even when there are new developments in technology, science, business activities and data. It is neither a rating of good or bad companies nor does it make a judgement of the financial performance of an investment, only environmental criteria.

Stakeholders have until 13 September 2019 to send comments. Before the end of 2019 and based on the received feedback, the technical expert group will develop further recommendations for the next European Commission.  In the meantime, member states have started their discussions to reach a final agreement on the wording of the regulation with the European Parliament and Council. The Commission wishes to adopt the legal implementing acts at the beginning of 2020 to start applying the Taxonomy Regulation for the financial sector.