EU publishes flagship report on what constitutes sustainable economic activity

Europe

Following multiple deadline extensions, the Technical Expert Group on Sustainable Finance (“TEG”) released its classification system for environmentally sustainable economic activities (the “Taxonomy”) this week. The policy establishes detailed technical screening criteria for the initial objectives of climate change mitigation and adaptation. It will be extended to cover the EU’s other key environmental objectives in the coming 2-3 years.

The Taxonomy is an important milestone for the finance sector generally and the European sustainable finance industry in particular, because:

  • it sets out the criteria which will determine whether any economic activity can be classed, and therefore marketed, as “green” within the EU; 
  • it will set the benchmark for all other environmentally geared standards; and
  • it is likely to be applied to determine whether a preferential capital adequacy requirement will apply to, thereby encouraging the flow of finance into, these activities.

Post Brexit, the Taxonomy will remain relevant to us in the UK because:

  • UK institutions may wish to market products as green or raise green finance within the EU (and thus will need to comply with this criteria) or create comparable products;
  • the UK government and the Bank of England have indicated that, as a matter of policy, the UK will maintain rules which are “equivalent” to EU standards in the financial sector; and
  • it will influence the existing voluntary standards applied by the UK green bond and green loan markets  

The scope and potential impact of this policy have been the subject of a great deal of speculation within the European financial markets to date, and the publication of the Taxonomy will no doubt be of great interest to financial institutions in the process of developing their own green and sustainable finance products. The Taxonomy is intended to inform future legislation in the field of sustainable finance and to create a harmonised approach to integrating sustainability factors into investment decisions.

Financial institutions seeking to future-proof their loan books are therefore advised to pay close attention to the methodology used in the development of the technical screening criteria in ascertaining whether their own green finance products would meet the requirements of the Taxonomy.  

Analysis on the Taxonomy will follow from CMS in due course.  In the meanwhile, for further information in relation to the Taxonomy and the EU’s Sustainable Finance Action Plan please contact members of the CMS Finance team.