Morningstar - Financing the Transition to a Sustainable Economy

On July 6^th, the European Commission published its Strategy for Financing the Transition to a Sustainable Economy, the successor of the EU’s Sustainable Finance Action Plan, which launched in 2018. The strategy focuses on transforming the financial system and financing transition plans, building on the 2018 Action Plan, which centered on developing the EU Taxonomy, putting in place disclosure regimes, and developing tools for the market to develop sustainable investment solutions and prevent greenwashing.

The new strategy identifies four main areas for action for the financial system to fully support the transition to a sustainable economy:

1. Financing the transition: tools and policies to finance transition plans and reach climate and other environmental goals
2. Inclusiveness: access to sustainable finance for individuals and small and medium companies
3. Financial sector resilience and contribution: support the financial sector to contribute to meeting the EU’s Green Deal targets, becoming resilient, and combat greenwashing
4. Global ambition: collaborating globally and promote an ambitious global sustainable finance agenda

The EU Taxonomy remains a key building block of the EU’s sustainable finance plans, and much further development is laid out in the strategy:Including the business activities that proved too politically challenging to include in last April’s Climate Delegated Act (e.g., agriculture and certain energy sectors such as nuclear and gas) in a complementary Delegated Act. In other words, the criteria for how such activities can be considered sustainable are being developed. Adoption of the act is expected after this summer.

• The criteria for the remaining Taxonomy objectives, water, circular economy, pollution prevention and biodiversity, will be adopted in the first half of 2022 and apply from 2023.
• A report on a social taxonomy is expected by the end of 2021.
• Work on a transition taxonomy and a taxonomy recognizing economic activities that perform at an ‘intermediary level’ will continue.

Taxonomy Rules on Reporting by Companies and Financial Institutions are now Available

Together with the new strategy, the Commission also published the rules for how and when companies (‘non-financial undertakings’) and financial institutions (‘financial undertakings’) need to do their Taxonomy-related reporting, the Delegated Act for Taxonomy Regulation article 8. A key change compared to previous versions and recommendations is that the timelines have been pushed out.

It seems that the final rules do not allow for the use of estimates of Taxonomy alignment. It appears that Do No Significant Harm principal estimations are permitted, but only on non-EU companies that report on the Substantial Contribution and the Minimum Safeguards criteria of the Taxonomy themselves.

Alignment data reported voluntarily, for instance, by EU small caps or non-EU companies, cannot only be included in the KPIs of financial undertakings until 2025. Presumably, the EU wants to avoid investors putting too much pressure on smaller companies to report alignment data and prefers first to figure out the exact requirements for those companies and how to support them in doing so.

Derivatives and sovereign assets are fully out of scope, at least until the next review of the regulation.

After close to a year where we saw our clients primarily focus on the Sustainable Finance Disclosure Regulation, we now see a shift back to the Taxonomy given its tight timelines and complexities. Investors are looking ahead and figuring out what they need to comply with the regulation and how they can use the Taxonomy as a broader framework for investment decision-making and impact reporting.

Sustainalytics recently launched a comprehensive new EU Taxonomy Solution that aims to support investors through the process.

It is the sole responsibility of the Sustainable Finance Partner to check the truthfulness, accuracy and completeness of the data and information entered on this web page, when within its competence and provided by the Partner. Borsa Italiana S.p.A. is not responsible for the contents developed by third parties and in particular by the Sustainable Finance Partners contained in this web page.