By Jan Vandermosten, senior policy analyst, EU, PRI
Almost two years since the EU Sustainable Finance Taxonomy was passed into law, investors are making progress on how to evaluate and report their activities.
PRI data shows that around 400 PRI signatories used the EU taxonomy to measure sustainability outcomes in 2021 – close to 10% of signatories at the time, and this was before reporting became mandatory. These findings underline the taxonomy’s potential to drive investment decisions towards sustainability goals.
The number of investors using the EU taxonomy to measure outcomes is set to rise as the framework develops and additional reporting requirements come into force.
As the regulation evolves, it is important that capital market participants can learn from each other and innovate in terms of how they implement the taxonomy. Global regulators are increasingly looking to capital markets to deliver on sustainability objectives and promote better practices.
Encouragingly, the signatories we interviewed for our new report, ‘Implementing the EU taxonomy’, are using the framework to develop innovative products, adapt processes and improve reporting. To name a few promising developments, investors are:
- Setting up cross-functional working groups within their organisations to oversee implementation.
- Conducting due diligence on any third-party data assessments to obtain credible data and engaging with investee entities to fill any data gaps.
- Improving reporting via substantiated figures in KPI calculations, using third-party validators to verify taxonomy alignment disclosures, and providing written explanations to contextualise alignment KPIs.
- Engaging with policy makers and supervisors on the scope and content of the regulation.
- Educating end investors to raise awareness and understanding.
Despite evidence of innovation from members of our Taxonomy Practitioners Group, some significant challenges remain for investors, including:
- Timing: Investors are required to make product-level disclosures before the reporting templates for these disclosures have passed into law.
- Data: There is limited public data on the taxonomy alignment of investee entities/assets.
- Interpretation: Investors are unclear on how certain performance thresholds should be interpreted.
It is also worth noting that the taxonomy’s interoperability and coherence with other sustainable finance regulations (e.g., the EU Green Bond Standard, EU Ecolabel, MIFID sustainability preferences, etc.) need to be ensured.
The taxonomy still provides, however, an invaluable framework for investors to promote sustainable practices. It is also a crucial tool to add weight to industry claims around responsible investment, by assessing and reporting on investors’ progress.
Key updates since we published our first report on the taxonomy in September 2020
November 2021: European Commission adopts legislative proposal for a European Single Access Point – a centralised hub of publicly available information on entities, including their sustainability performance.
December 2021: EU Taxonomy Climate Delegated Act and the EU Taxonomy Disclosures Delegated Act pass into law.
January 2022: Product-level disclosure of taxonomy alignment in relation to the first two environmental objectives (climate mitigation and climate adaption) becomes mandatory. Investors that market financial products with an environmental objective must disclose the percentage of the underlying investments that are taxonomy-aligned.
February 2022: European Commission adopts a Complementary Climate Delegated Act covering nuclear energy and gas, which is now subject to scrutiny by the European Parliament and European Council. The Platform on Sustainable Finance publishes a report on a social taxonomy.
April 2022: European Commission adopts a Delegated Regulation on taxonomy-related disclosures for financial products under the Sustainable Finance Disclosure Regulation. This Delegated Regulation is now subject to approval by the European Council and European Parliament.
Respondents to our paper highlighted the need to adopt a long-term mindset and recognise that these initial challenges will be resolved over time. As Sarah Peasey, Director of European ESG Investing at Neuberger Berman, said: “It’s like the Sagrada Família in Barcelona: it’s never going to be finished. So rather than holding back and waiting for some kind of finalisation of the taxonomy, we’ve taken the approach of going ahead.”
Alex Stevens, CEO of Greenomy, added, “The important thing is to think about timeframes. The taxonomy is here for the next 30 years at least. It might seem challenging to implement in the short term, but it’s very valuable over the long term.”
The EU taxonomy is key to responding to three challenges faced by the investment industry: substantiating claims, engaging with investees and reallocating capital. The PRI will continue to work with signatories and policy makers to shape taxonomy developments in the EU and around the world.
Read Implementing the EU taxonomy: An update to the PRI’s ‘Testing the taxonomy report’, here.
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