The EU has been a leader in implementing sustainable finance and business regulations. Two of the most notable rules introduced by the European Commission’s Action Plan on Sustainable Finance include the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR). The two regulations are closely interlinked and aim to ensure equal competition in the EU. They also share the goals of the Green Deal, including:
- The redirection of capital towards sustainable investments.
- Incorporating sustainability in risk management.
- Encouraging long-term investment and economic activity.
The EU Taxonomy Regulation
Implemented in 2020 as part of the EU’s 2019 Green Deal, the EU Taxonomy Regulation is primarily a classification tool that provides a framework for sustainability in business. The framework states that economic activity must be considered environmentally sustainable by meeting the following requirements:
- Contribute to one of the following environmental objectives:
- Climate change mitigation
- Climate change adaptation
- use and protection of water and marine resources
- The transition to a sustainable economy
- Pollution prevention control
- The safety and restoration of biodiversity and the ecosystem
- Do not cause significant harm to any of the other environmental objectives.
- Comply with minimum social and governance objectives.
Who does the EU Taxonomy apply to?
The EU Taxonomy applies to companies in the EU with more than 500 employees that fall under the non-financial reporting directive.
Sustainable Finance Disclosure Regulation (SFDR)
As part of the EU regulation, the SFDR was created to increase transparency and regulation in the financial market, particularly around sustainable investing products. The SFDR regulation also aims to encourage the consideration of environmental and social risks that impact investments and to prevent greenwashing in the financial industry.
The SFDR has three main articles within it. These articles are used to classify financial products.
- Article 6: Applies to funds that do not have sustainability factors integrated into them. According to the SFDR, an article 6 fund must be transparent and clearly labelled as a non-sustainable fund. This could include funds that invest exclusively in fossil fuels.
- Article 8: An Article 8 fund is a fund that promotes ESG characteristics, but they do not necessarily have specific ESG objectives. This category could include funds that include fossil fuel energy companies that invest in some renewable energy.
- Article 9: SFDR’s article 9 includes funds with ESG factors at their core.
Who does the SFDR apply to?
The SFDR applies to those involved in the financial market in the EU, including asset managers, pension funds investment firms and financial advisors.
For more information on the EU Taxonomy Regulation and the SFDR, head over to the official EU Taxonomy webpage.
Want to read more about sustainable finance?
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