EU Green Taxonomy to Channel Capital to Sustainable Activities

The EU taxonomy of sustainable activities enables regulators and investors to evaluate the sustainability of economic activities and informs a range of regulatory frameworks like the Green Bond Standard and Sustainable Finance Disclosure Regulation for asset managers. The revised Non-Financial Reporting Directive (NFRD) is due to come into force for companies with over 500 employees on January 1, 2022. This will require companies to report the share of revenue, capital, and operating expenditure that is taxonomy-aligned. Science-based performance thresholds are included for more than 70 economic activities that represent major sources of EU emissions. The focus, however, is on direct emissions, instead of indirect or supply-chain related, and some polluting activities like agriculture have been omitted. $93 trillion of investment is needed in low-carbon technologies over the coming decade to meet Paris Agreement targets. The European Securities and Markets Authority’s disclosure recommendations for the NFRD are the most consequential aspect of the taxonomy given the low levels of full alignment across most activities, as well as fulfills huge financing needs for low-carbon transition in high-impact sectors. The standardization will also spur the growth of sustainability-linked debt issuances. Engagement between EU, China, and other countries continues through the International Platform on Sustainable Finance, also known as the “common ground taxonomy”.  This acts as a benchmark from which regional considerations can be adapted, as well as reduces reporting burdens for corporations and investors operating across geographies.