Part 1 of this advisory series provides an overview of the key provisions of the Disclosures Regulation1 . Part 2 in this series considered the BMR Amendment2 . This part looks at the key provisions of the regulation on the establishment of a framework to facilitate sustainable investment and amending the Disclosures Regulation (the "Taxonomy Regulation")3 with the majority of the provisions entering into force on 12 July 2020.

This regulation applies to (i) measures adopted by the European Union or its member states that set out requirements for financial market participants or issuers in respect of financial products or corporate bonds that are made available as environmentally sustainable; (ii) financial market participants (as defined in the Disclosures Regulation) that make available financial products (as defined in the Disclosures Regulation); and (iii) undertakings which are subject to the obligation to publish a non-financial statement or consolidated non-financial statement pursuant to the Accounting Directive4 .

The Taxonomy Regulation establishes the criteria for determining whether an economic activity is environmentally sustainable ("Environmentally Sustainable Criteria") for the purposes of establishing the degree of environmental sustainability of an investment. Consideration must be given to an economic activity in the context of the following six environmental objectives:

  1. climate change mitigation;
  2. climate change adaptation;
  3. the sustainable use and protection of water and marine resources;
  4. the transition to a circular economy;
  5. pollution prevention and control; and
  6. the protection and restoration of biodiversity and ecosystems (the "Environmental Objectives").

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The Taxonomy Regulation provides that the European Union and its member states shall apply the criteria in the box entitled "Environmentally Sustainable Criteria" for the purposes of any measures setting out requirements for financial market participants or issuers in respect of financial products or corporate bonds that are made available as "environmentally sustainable" from 1 January 2022 in respect of climate change mitigation and climate change adaptation and from 1 January 2023 in respect of the other four Environmental Objectives.

Pre-contractual disclosures and disclosures in periodic reports

Where a financial product (i) has sustainable investment as its objective and an index has been designated as a reference benchmark; (ii) has sustainable investment as its objective and no index has been designated as a reference benchmark; (iii) has a reduction in carbon emissions as its objective, and invests in an economic activity that contributes to an Environmental Objective within the meaning of the "Sustainable Investment" definition in the Disclosures Regulation; or (iv) promotes environmental characteristics, the following information must be disclosed in its precontractual disclosures and its periodic reports in addition to the disclosures required in accordance with the Disclosures Regulatio

  1. the information on the Environmental Objective(s) to which the investment underlying the financial product contributes;
  2. a description of how and to what extent the investments underlying the financial product are in economic activities that qualify as environmentally sustainable. This description shall specify the proportion of investments in environmentally sustainable economic activities selected for the financial product, including details on the respective proportions of enabling and transitional activities, as a percentage of all investments selected for the financial product;
  3. where a financial product promotes environmental characteristics the following additional disclosure is required, "The "do no significant harm" principle applies only to those investments underlying the financial product that take into account the EU criteria for environmentally sustainable economic activities. The investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable economic activities."

Where a financial product does not fall within any of the above categories, the following statement should be included in its pre-contractual disclosures and its periodic reports:

"The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities."

Where an undertaking is subject to the obligation to publish non-financial information pursuant to the Accounting Directive it is required to include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking's activities are associated with economic activities that qualify as environmentally sustainable. Non-financial undertakings need to disclose:

  1. the proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable; and
  2. the proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable.

These disclosures are required to be included from 1 January 2022 in respect of climate change mitigation and climate change adaptation and from 1 January 2023 in respect of the other four Environmental Objectives.

Technical screening criteria

While the Taxonomy Regulation sets out requirements for technical screening criteria, it also tasks the European Commission with adopting delegated acts to establish technical screening criteria relating to each of the Environmental Objectives in accordance with these requirements. Prior to these delegated acts being adopted the European Commission must consult with the Platform on Sustainable Finance, a group established in accordance with the provisions of the Taxonomy Regulation.

The deadline for the adoption of the delegated acts in respect of climate change mitigation and climate change adaptation is 31 December 2020, with a view to ensure their entry into application on 1 January 2022 with the deadline for adoption of the delegated acts in respect of the other four Environmental Objectives by 31 December 2021, with a view to ensure its entry into application on 1 January 2023.

Amendments to the Disclosures Regulation

The provisions of the Disclosures Regulation relating to: (i) transparency of the promotion of environmental or social characteristics in precontractual disclosures; (ii) transparency of sustainable investments in pre-contractual disclosures; and (iii) transparency of the promotion of environmental or social characteristics and of sustainable investments in periodic reports are amended to reflect the information set out in the paragraph entitled "Pre-contractual disclosures and disclosures in periodic reports" above.

Additional draft technical standards are to be developed relating to the:

  1. principle to "do no significant harm" set out in the definition of "Sustainable Investment" in the Disclosures Regulation. These draft standards are to be submitted to the European Commission by 30 December 2020;
  2. details of the content and presentation of the information relating to the transparency of the promotion of environmental or social characteristics in pre-contractual disclosures. These draft standards are to be submitted to the European Commission by 1 June 2021 in respect of climate change mitigation and climate change adaptation and by 1 June 2022 in respect of the other four Environmental Objectives;
  3. details of the content and presentation of the information relating to the transparency of sustainable investments in pre-contractual disclosures. These draft standards are to be submitted to the European Commission by 1 June 2021 in respect of climate change mitigation and climate change adaptation and by 1 June 2022 in respect of the other four Environmental Objectives; and
  4. details of the content and presentation of the information relating to the transparency of the promotion of environmental or social characteristics and of sustainable investments in periodic reports. These draft standards are to be submitted to the European Commission by 1 June 2021 in respect of climate change mitigation and climate change adaptation and by 1 June 2022 in respect of the other four Environmental Objectives.

Further updates

Work is being undertaken in relation to the establishment of EU labels for green financial products. Amendments are being considered to the legislation governing UCITS, AIFMs, insurers and investment firms and advisers to clarify how sustainability risks and other sustainability factors can be integrated into organisational, operational and risk management processes. Part 4 of this series considers the proposed amendments to the legislation governing UCITS and AIFMs.

Footnotes

1. Regulation (EU) 2019/2088.

2. Regulation (EU) 2019/2089.

3. Regulation (EU) 2020/852.

4. Directive 2013/34/EU.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.