Introduction
The Taxonomy Regulation EU 2020/852 (Regulation) is part of the European Union’s efforts to achieve the objectives of the “Green Pact”, whose overarching goal is to make Europe climate neutral by 2050.
The term “taxonomy” relates to a categorization that identifies economically sustainable activities based on their greenhouse gas emissions. As such, the European taxonomy serves as a mechanism to help companies and investors in making sustainable investment choices by:
- Channelling private capitals towards economic activities recognized as environmentally sustainable, at the expense of activities deemed environmentally harmful.
- Labelling environmentally friendly financial products to combat greenwashing.
The Taxonomy Regulation constitutes a classification system and implements new transparency obligations against which companies will have to report.
Framework legislation
The EU Taxonomy is a classification system for economic activity, which sets out new legal obligations for financial market participants, large companies, the EU and Member States . Under Article 3 of the Regulation, an economic activity is considered environmentally sustainable if it:
- contributes substantially to the achievement of one or more of the six EU environmental objectives;
- does not cause significant harm to any of the six objectives;
- is carried out in compliance with minimum international social and labour standards, in recognition of the principles enshrined in the European Social Charter.
Under Article 9, the six core objectives to which economic activities must contribute to be considered sustainable are the following:
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.
In order for an activity aiming at one or more of the six objectives to be classified as sustainable, it must not result in significant harm to any of the other objectives of the European taxonomy.
Among the activities that make a significant contribution to one or more environmental objectives, the European Taxonomy also establishes two classification categories: enabling and transitional activities.
Enabling activities facilitate other activities in making a significant contribution to one or more of the Taxonomy's six objectives. However, enabling activities must not result in a ‘lock-in’ of assets that could undermine long-term environmental goals. They must also exhibit substantial positive environmental impact throughout the lifecycle of the activity.
Transitional activities are required to contribute to mitigating climate change and following a path aligned with the commitments of the “Green Pact”. Transitional activities are eligible only if the following conditions are satisfied:
- No feasible low-carbon alternatives exist either technologically or economically.
- Greenhouse gas emission levels align with the best performance within the sector or industry.
- The activity does not lead to carbon lock-in or impede the advancement and implementation of low-carbon alternatives.
In practice, financial market participants offering financial products in Europe must now incorporate disclosures with reference to the Taxonomy. The disclosure requirements vary depending on product categories. Most companies that fall under the SFDR will be required to report on how their products align with the EU Taxonomy. Companies subject to disclosure requirements under the Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD) must make disclosures with reference to the EU Taxonomy.
Implementing measures
Technical Screening Criteria for environmental objectives CDR (EU) 2021/2139
CDR (EU 2021/2139) came into effect on 1 January 2022 and establishes the technical screening criteria for determining under which conditions an economic activity can be considered to substantially contributing to climate change mitigation, and for determining whether that economic activity causes no significant harm to any of the other environmental objectives laid down in Article 9 of the Regulation. The CDR looks in detail at various sectors, such as forestry, manufacturing, energy, transport, construction, information and communication.
Content, calculation methods, and presentation of sustainability indicators CDR (EU) 2021/2178
CDR (EU) 2021/2178 establishes the content, calculation methods, and presentation of sustainability indicators to be published by companies in accordance with Article 8 of the Regulation (regarding transparency of undertakings in non-financial statements), which requires non-financial undertakings to disclose information on the proportion of the turnover, capital expenditure and operating expenditure (‘key performance indicators’) of their activities related to assets or processes associated with environmentally sustainable economic activities.
Since 1 January 2022, companies subject to the obligation of publishing non-financial information according to Articles 19 or 29 bis of the consolidated Directive 2013/34/EU (Accounting Directive) are required to publish sustainability indicators. This notably includes publicly traded companies, credit institutions, and insurance companies.
Starting 1 January 2023, non-financial companies are required to perform comprehensive reporting, disclosing indicators related to activities aligned and non-aligned with the European Taxonomy.
From 1 January 2024, financial companies will also have to adhere to comprehensive reporting, presenting alignment indicators with the EU Taxonomy. These indicators are detailed by economic activity and environmental objective following the formats established in the delegated regulation. Qualitative information is also required to explain indicator composition, eligible activities, allocation methodologies, and how technical alignment criteria were assessed.
CDR 2022/1214 – on nuclear and gas-related activities
CDR 2022/1214 incorporates nuclear and gas-related activities into economically sustainable activities listed in Annexes I and II of CDR EU 2021/2139 dated June 4, 2021. After thorough debates within European institutions, this new regulation acknowledges that nuclear and fossil gas energy production can play a role in the decarbonization of the EU economy. The activities included under this regulation encompass the secure construction and operation of new nuclear power plants, electricity production from nuclear energy in existing facilities, as well as high-efficiency heat/electricity cogeneration from fossil gas fuels. CDR 2022/1214 became effective 1 January 2023.
Two delegated regulations under the Taxonomy Regulation have been published in the Official Journal of the European Union (OJEU) on 21 November 2023:
- Commission Delegated Regulation (EU) 2023/2485 of 27 June 2023 amending Delegated Regulation (EU) 2021/2139 establishing additional technical screening criteria for determining the conditions under which certain economic activities qualify as contributing substantially to climate change mitigation or climate change adaptation and for determining whether those activities cause no significant harm to any of the other environmental objectives.
- Commission Delegated Regulation (EU) 2023/2486 of 27 June 2023 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to the sustainable use and protection of water and marine resources, to the transition to a circular economy, to pollution prevention and control, or to the protection and restoration of biodiversity and ecosystems and for determining whether that economic activity causes no significant harm to any of the other environmental objectives and amending Commission Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities
Supervisory convergence
Technical Expert Group
The European Commission established a Technical Expert Group (“TEG”) consisting of 35 members to aid in the development of the European taxonomy and provide guidelines. On March 9, 2020, the TEG released a final report containing recommendations for the European taxonomy, guidance on its use by businesses and financial institutions, as well as technical criteria for 70 climate-related activities and 68 activities related to other environmental objectives. It should be noted that the TEG’s recommendations exclude gas and nuclear from the scope of the green taxonomy.
TEG final report on the EU taxonomy (europa.eu)
The Platform on Sustainable Finance
Established in accordance with Article 20 of the Taxonomy Regulation, the Platform on Sustainable Finance is an advisory group comprised of 35 members and 15 observers, bringing together experts representing various stakeholders involved in sustainable development. This Platform provides advice regarding the use of the taxonomy, technical criteria, and monitors capital flows towards sustainable investments.
Platform on Sustainable Finance (europa.eu)
Commission provides further clarifications on the EU taxonomy for sustainable economic activities
The Commission has published a set of frequently asked questions (FAQs) to support stakeholders in the implementation of the EU taxonomy, a classification system for sustainable economic activities. The publication, which aims to make the taxonomy easier to use, is part of the Commission’s simplification agenda and its effort to reduce the administrative burden on companies applying the EU sustainable finance framework.
The FAQs provide technical clarifications regarding various elements of the EU taxonomy. Among other things, they cover the application of general taxonomy requirements and technical screening criteria for specific activities included in the Taxonomy Climate and Environmental Delegated Acts. They also address the generic ‘do no significant harm’ (DNSH) criteria that ensure that economic activities contributing to one of the environmental objectives set out in the Taxonomy Regulation do not cause significant harm to any of the other environmental objectives. Moreover, the FAQs clarify the reporting obligations for activities covered by the Climate Delegated Act and the Environmental Delegated Act.
Commissioner for Financial Services, Financial Stability and Capital Markets Union, Mairead McGuinness, said: “The EU taxonomy provides investors with a common understanding of the environmental impacts of their investments while guiding companies’ sustainable transition efforts. Our focus now is to improve the usability of the framework and these FAQs will help companies as they apply the taxonomy”.
The EU taxonomy is a cornerstone of the EU’s sustainable finance framework and an important market transparency tool. It helps direct investments to the economic activities most needed for the transition, in line with the European green deal objectives. More information on the EU taxonomy can be found on the Commission’s website as well as on the EU taxonomy navigator and on this factsheet about the framework’s uptake on the ground.
National implementation
The EU Taxonomy Regulation applies directly in Austria and does not require incorporation into national laws.
Contacts: Jasna Zwitter-Tehovnik | DLA Piper Anže Molan | DLA Piper
European texts: Taxonomy regulation
The Taxonomy Regulation does not necessitate incorporation into national laws. In Belgium, neither the NBB or the FSMA have specifically addressed the Taxonomy Regulation, other than summarising the applicable requirements (e.g. FSMA Communications of 29 April 2022 and 4 July 2023).
Contacts: Pierre Berger / Alexander Hamels
The Taxonomy Regulation does not require incorporation into national laws. Nevertheless, the Croatian Agency for Control of Financial Services (HANFA) issued Guidelines for the Preparation and Disclosure of ESG-Relevant Information by Issuers (Smjernice za izradu i objavu ESG relevantnih informacija izdavatelja). These guidelines provide further details regarding the reporting under the EU Taxonomy Regulation, which aims to establish a classification system for sustainable economic activities. It specifies the obligations for issuers to report on how their activities align with the taxonomy's environmental objectives.
Furthermore, the guidelines outline requirements under the Sustainable Finance Disclosure Regulation (SFDR) for financial market participants and financial advisers to disclose sustainability-related information, influencing issuers to publish relevant ESG data.
Contacts: Jasna Zwitter-Tehovnik | DLA Piper Ivan S. Males | DLA Piper
European texts: Taxonomy regulation
The Taxonomy Regulation does not necessitate incorporation into national laws. In France, the ACPR has not specifically addressed the Taxonomy Regulation. Nevertheless, the ACPR has issued a recommendation concerning sustainability factors as outlined in the Sustainable Finance Disclosure Regulation (SFDR) within the context of life insurance.
Specifically, the ACPR introduced Recommendation 2022-R-02 on 14 December 2022, focusing on "green" life insurance products, which became effective on 1 April 2023. This recommendation complements Recommendation 2019-R-01, which pertains to advertising communications for life insurance contracts, issued on 6 December 2019. It applies to individuals defined in Sections I and II of Article L. 612-2 of the French Monetary and Financial Code, including those operating in France under the regime of free provision of services or free establishment.
Recommendation 2022-R-02 addresses three categories of advertising communications:
- Those that promote the non-financial characteristics of a life insurance or capitalization contract, including offered investment options.
- Those that emphasize the non-financial characteristics of life insurance or capitalization without specifying a particular contract or investment option.
- Those that highlight the commitment or scope of actions taken.
In line with the SFDR, the regulator advises subject entities not to employ misleading arguments regarding the commitment or scope of actions related to sustainability criteria, or regarding the extent of sustainability-related investments made by clients (Article 3.5.1). Consequently, subject entities are responsible for ensuring that their advertising claims are based on objective and specific elements related to the scope of sustainability-related investments and the non-financial aspects of contracts.
Furthermore, the ACPR requires subject entities to provide a direct and easily accessible link to the webpage containing information to be disclosed in accordance with the European SFDR regulation. Additionally, the ACPR mandates that subject entities incorporate measures to address the risk of greenwashing into their methods and procedures for controlling advertising communications (Article 3.6.1).
Contacts: Luc Bigel / Hamza Akli
European texts: Taxonomy and Sustainable Finance Disclosure Regulation
The Taxonomy Regulation does not necessitate incorporation into national laws.
In Germany, in addition to the supervisory measures listed above, a reckless or wilful violation of the provisions of the SFDR results in an administrative offence punishable by a fine.
According to Sect. 332 para. 4k VAG, any person who intentionally or recklessly
- fails to ensure that the information re transparency of either adverse sustainability impacts at entity level or or remuneration policies in relation to the integration of sustainability risks or the promotion of environmental or social characteristics and of sustainable investments on websites, is made public or kept up to date; or
- does not disclose information re transparency of the integration of sustainability risks including adverse sustainability impacts or of environmental or social characteristic or sustainable investments as its objective at all, correctly, completely, in the prescribed manner or before the conclusion of the contract
infringes the SFDR as amended by Regulation (EU) 2020/852 and therefore incurs a fine under the VAG.
European texts: Taxonomy Regulation
- The Taxonomy Regulation was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020. The Taxonomy Regulation applies in Ireland and other Member States automatically without the need for further action.
- In June 2023, in a speech on “Insurance, Regulation, and the Transition to a Net Zero Economy” by Gerry Cross, the Director of Financial Regulation, Policy & Risk of the Central Bank of Ireland, he makes the following remarks:
Insurance Protection Gaps
- It is expected that there will be an increase in protection gaps, a systemic issue (e.g. a particular risk type in a particular area, insurance coverage is either not available or so expensive as to be prohibitive).
- The CBI is part of several initiatives, working with EIOPA and the International Association of Insurance Supervisors (IAIS) Protection Gap Taskforce to better understand the issues and contribute multi-stakeholder solutions in a broader context.
Sustainable Finance
- Sustainability disclosures are aimed at increasing transparency for investors in relation to the risks associated with investment products, and the integration of sustainability risks at the product and entity level.
- Compliance with sustainable finance legislation should trigger actions that have an impact, including a cultural alignment within firms, all while having the goal in mind of moving to a more sustainable, climate neutral society.
- The CBI supports a recent publication by the European Commission which emphasizes that a sustainable finance framework must be suited to companies and make this framework easier to use. The CBI are considering how they can provide more clarity for firms, focusing on how we can work together to deliver meaningful impact.
Greenwashing
- For both the CBI and other regulators, the challenge to ensure that financial services and products make sustainability claims which they can deliver on - paramount to maintaining consumer trust.
- Greenwashing may be exacerbated by insufficient supply of sustainable products in the market and where firms may assume a competitive advantage and mis- or over-state sustainability credentials.
Risk Management and Supervisory observations
- Climate change is no longer an emerging risk and insurers should be treating it as such.
- Insurers should pay special mind to their business models in the context of climate change and adapt these. In addition, the need to conduct sufficient stress and scenario testing should not be understated.
- In Ireland, insurers place significant reliance on group for reinsurance, expertise and capital; this engagement needs to be tailored to the Irish insurer and the risks arising from this reliance be appropriately understood and managed.
Climate Change Guidance
- A climate change guidance for the insurance sector, published by the CBI sets out clear expectations and establish a baseline on which insurers can build on.
- The guidance sets out the principles underpinning supervision by the CBI, a window into how supervision will be undertaken. The guidance recognizes predictability, proportionality based on the nature, scale and complexity of an insurer.
- The CBI is mindful of associated costs for industry and has incorporated a cost-benefit analysis in its consultation paper, together with anticipated consequences of an insurer’s failure to act.
- Part of the strategic themes, which the CBI upholds is open and effective stakeholder engagement.
For more on Gerry Cross’s important remarks, see: Insurance, regulation, and the transition to a net zero economy – Remarks by Gerry Cross, Director of Financial Regulation, Policy & Risk (centralbank.ie)
To read the CBI’s Climate Change Guidance: CP151 - Guidance for (Re)insurance Undertakings on Climate Change Risk (centralbank.ie)
Contacts: Naoise Harnett / Lindi Raath | DLA Piper
European texts: Taxonomy regulation
The Taxonomy Regulation does not necessitate incorporation into national laws.
Notwithstanding the above, with Order no. 131/2018, the Italian Insurance Authority (IVASS) made some amendments to IVASS Regulation no. 40/2018 in the matter of insurance distribution, in order to make it consistent with Taxonomy Regulation.
In particular, in the matter of pre-contractual information, it is required that the description of risks associated with IBIPs must encompass sustainability risks, aligning with SFDR and the Taxonomy Regulation.
Contacts: David Marino / Valentina Grande
The Taxonomy Regulation does not necessitate incorporation into national laws.
In June 2020, the AFM has published a Position Paper on AFM’s views on sustainability. The AFM has not specifically addressed the insurance sector. However, the AFM has indicated that issues such as climate change, the provision of information on sustainable investments, the standardization of sustainability information and greenwashing are of particular importance in AFM’s supervision.The Taxonomy Regulation and the SFDR have been incorporated into Norwegian law through reference in a new act called the Act on Disclosures of Sustainability Related Information in the Financial Sector and a Framework for Sustainable Investments (Nor, “Lov om offentliggjøring av bærekraftsinformasjon i finanssektoren og et rammeverk for bærekraftige investeringer”).
As of now, the authorities have not published any information concerning insurance undertakings specifically in terms of the requirements in the Taxonomy regulation.
The NFSA has published an information site concerning “Supervisory expectations in relations to compliance with new regulations on sustainability.” However, as of now, the site only includes reference to relevant level 1 and level 2 acts from the EU.
Contacts: Hugo-A. B. Munthe-Kaas, Head of Compliance | DLA Piper / Marthe Oldernes, Associate | DLA Piper
The application of the Taxonomy Regulation's environmental criteria is specified in delegated acts adopted by the Commission. At the national level, some legislative measures have been implemented as a result of the Taxonomy Regulation, which have been deemed necessary for the application of the Regulation in Sweden. The new rules are not linked to the delegated acts and do not address the issue of what is to be considered environmentally sustainable. The rules entered into force on 1 January 2022. The new legislation addresses for example the following:
- Disclosure requirements are introduced in the Annual Accounts Act stating that the Regulation contains additional provisions on what a sustainability report must contain.
In addition, Sweden has prescribed that EU Regulation on sustainability-related disclosures (2019/2088) shall apply to advice on investment based insurance products and insurance mediators with less than three employees (Swedish Act on Insurance Mediation, Chapter 6 Section 1 a,b).
Contacts: David Johansson, Managing Associate | DLA Piper Frida Nordström, Senior Associate | DLA Piper
The EU Taxonomy Regulation was adopted after Brexit and therefore has no applicability in the UK. However, the UK government is committed to deliver a UK Green Taxonomy in order to provide investors with definitions of economic activities that can be labelled as "green". It is currently unclear when the UK Green Taxonomy will come into force, however, the Green Technical Advisory Group (GTAG) has published some advice in 2023. For further information, contact our lawyers.
Contacts: George Mortimer / Matthew Hunter | DLA Piper
The EU Taxonomy Regulation applies directly in Slovenia and does not require incorporation into national laws.
Contacts: Jasna Zwitter-Tehovnik | DLA Piper Domen Brus | DLA Piper
