The new EU classification for sustainable investments (EU taxonomy)

Dr. Antonios Koumbarakis Partner, Sustainability & Strategic Regulatory, PwC Switzerland 28 Feb 2020

“The world's first-ever green list”

After a long and difficult political process, the first common classification system for “green” economic activities is on its way to becoming a reality. The Taxonomy Regulation aims to provide investors with standardised definitions to help them evaluate the environmental impact of their investments and reduce “greenwashing”. It distinguishes between six environmental objectives and prescribes methods for evaluating economic activities according to these 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

Protection and restoration of biodiversity and ecosystems

Detailed technical screening criteria for each environmental objective are also being developed, with the first delegated acts (for environmental objectives 1 and 2) expected in December 2020. The criteria will likely be based on the June 2019 proposals by the technical expert group on sustainable finance. Furthermore, detailed regulatory technical standards for a corresponding disclosure is envisioned, starting from mid-2021.

Political agreement on the Taxonomy Regulation text was confirmed by the Council’s Committee of Permanent Representatives (COREPER) on 5 February 2020, marking another step towards its finalisation. The final Regulation is expected to be published in the Official Journal in May 2020.

The implications

Apart from providing classification criteria for environmentally sustainable activities, the taxonomy introduces amendments to the recently introduced Disclosure Regulation on sustainability‐related disclosures in the financial services sector. Most notably, it has great implications for sustainable financial products, which can be separated into dark green and light green products. Depending on the latter categorisation, financial market participants and financial advisors will be required to provide information on the environmental objective of the investment according to the taxonomy as well as details on the proportion of the investment in environmentally sustainable economic activities.

Examples of required due diligence level
  • Companies (for equity funds)
  • Underlying companies (for ETF)
  • Companies/issuers (for bond funds)
  • Underlying funds & investments (for funds of funds)
  • Real estate properties (for real estate funds)
  • Private companies/SMEs (for private equity)
  • Infrastructure projects (for infrastructure funds)
  • Underlying funds & investments (for IBIP)
  • Underlying issuer and financed activity (for securitisation funds)

Such a disclosure will necessitate a complex assessment of the underlying assets of the investment product to identify details such as:

  • what percentage of the underlying economic activities are classified as environmentally sustainable
  • what percentage of the revenue is attributed to these activities.

The scope is overarching, since the Disclosure Regulation is applicable to a broad variety of financial products (such as managed portfolios, funds, pension products and insurance-based investment products). Pending future legislation, the process could be simplified by direct investment in products with recognised ESG certification (e.g. EU green bonds), where additional due diligence would not be required.

Are you ready?

To respond to the implications of the taxonomy, financial market participants and financial advisors should address the following:

Due diligence process

A detailed assessment of the manufactured or distributed financial products will be required. This could be performed as part of an internal or external due diligence process.

ESG data

The assessment requires robust and detailed ESG data on the underlying assets and economic activities. This might require a conversation with companies or issuers on the provision of the required data and their independent assurance. Depending on the selected implementation approach, the process might involve external ESG data providers, ESG rating agencies, ESG scores or different tools for ESG analysis.

Investment strategy

Based on the due diligence results, corrective actions might be required (divestment, underweighting, allocation). Implementation of the taxonomy should complement the implementation of other regulatory requirements stemming from the EU Action Plan, such as incorporating ESG factors into product management, portfolio management and risk management.

Reporting systems

The taxonomy will affect various disclosure documents and will thus require changes to the current reporting process, likely having an impact on IT systems.

How can we support you?
  • Taxonomy scoping and impact analysis
  • Regulatory gap analysis
  • Guidance, workshops and SME support
  • Identification of required underlying data
  • ESG data provider selection
  • Implementation

Contact us

Dr. Antonios  Koumbarakis

Dr. Antonios Koumbarakis

Partner, Sustainability & Strategic Regulatory, PwC Switzerland

Tel: +41 58 792 45 23

Sofia Jaccard

Sofia Jaccard

Senior manager, Sustainability & Strategic Regulatory, PwC Switzerland

Tel: +41 58 792 26 87