Finance

5 questions around green taxonomy and sustainable finance

What is green taxonomy?

The European Commission has made sustainable finance one of the priorities of the Capital Markets Union and one of the pillars for achieving carbon neutrality by 2050. Following the publication in March 2018 of its action plan on sustainable finance, the European Commission has implemented several regulatory initiatives including the Taxonomy regulation. “Green taxonomy is a common base for the whole European Union defining what is a sustainable economic activity?explains France Vassaux, Managing Director of France Invest, who published a guide to sustainable finance in September 2021. To define what part of the economy is truly green, the European Commission has set six environmental objectives : the mitigation of global warming, the adaptation to global warming, the sustainable use and protection of water resources and marine resources, the transition to a circular economy, but also the control and prevention of pollution as well as protection and restoration of biodiversity and ecosystems.

An economic activity is aligned with the taxonomy when it meets the four conditions following: to contribute substantially to one or more of these objectives environmental, cause no significant harm to other objectives over the entire life cycle of the products and services of the activity, meet minimum standardss in social matters and governance (Human Rights, conventions of the International Labor Organization, etc.), and meet the technical review criteria which make it possible to measure the contribution to the objectives or the degree of harm (thresholds, practices used, standards to be respected, etc.). “The taxonomy currently only concerns the environmental aspect. The social aspect will be dealt with later.indicates France Vassaux.

Who is concerned ?

Since January 1, 2022, this text has been binding on companies with more than 500 employeesalready subject to the declaration of non-financial performance (DPEF), whose higher turnover is greater than 40 million euros. Financial market players, namely asset managers, banks, insurance companies and institutional investors (such as central banks) are also concerned.

What does this imply concretely for companies and finance departments?

The first thing to do is to ensure that the economic activity of the company is recorded in the eligible list. Not all economic activities are covered by the taxonomy. In spring 2021, the European Commission published the delegated acts. About 100 activities are included, such as construction, real estate, manufacturing, transport considered sustainable provided they meet the technical review criteria. Some activities are not yet listed such as agriculture, gas or nuclear. The scope of eligible activities will expand. We are on a right under construction”warns France Vassaux. To align with the taxonomy, the eligible economic activities of companies must contribute substantially to at least one of the six environmental objectives provided for by the texts. “Only two objectives were detailed by the delegated act of June 2021 and are currently applicable. It’s about climate change adaptation and climate change mitigation.comments France Vassaux. The other four objectives will be applicable from 1 January 2023 and their technical review criteria will be detailed before this date.

Non-financial companies subject to the obligation to publish a declaration of extra-financial performance will have to indicate the share of their turnoveras well as those of their investments and operating expenses, that correspond to sustainable activities as defined in the European Green Taxonomy. Financial market participants will have to assess the share of green investments in their asset portfolios, and specify to their clients whether or not their financial products are aligned with the green taxonomy.

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The European Commission has also implemented the Disclosure Regulation. What does it consist on ?

The Disclosure Regulation constitutes, with the Taxonomy, the cornerstone of the European Commission’s action plan for sustainable finance. regulationsalso called SFDRintended to improve transparencye relating to ESG towards investors. In other words, since 2021 this regulation has required players who finance the economy (banks, insurance companies, pension funds, management companies) to publish information on the consideration of extra-financial criteria in their investment policy. Bpifrance must, for example, report on the implementation of sustainable investments. “This new framework obliges them to transmit clear and precise information on the way in which they carry out their investment in order to achieve sustainable objectives”comments France Vassaux.

Will this green taxonomy alignment be extended?

This regulation is only a step. “The next two steps focus onscope extension declaration of non-financial performance for companies with more than 250 employees and whose turnover or balance sheet will be above certain thresholds, applicable by 2024 and on the integration of extra-financial criteria via accounting, “ reports France Vassaux. Near 60,000 businesses will be concerned in Europe. Work and working groups have been undertaken by Efrag, a European financial reporting advisory group. Their objectives: to estimate the level of environmental commitment of companies in order to connect them to financial data, and better decipher corporate strategies.

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