Orbit “Fundamentals′ Thursdays” Series: Louise (accompanied) talks about EU Taxonomy

Recap on the EU Taxonomy

The EU Taxonomy serves as a fundamental component of the European Union's sustainable finance framework, offering a tool for more market #transparency. It functions as a classification system designed to establish criteria for economic activities that align the intention to achieve a net-zero trajectory by 2050 and other environmental goals, not limited to climate change.

When it comes to reporting, the Taxonomy differentiates between Taxonomy-eligibility and Taxonomy-alignment:

Taxonomy-eligibility means an economic activity that is covered by the EU Taxonomy.

Taxonomy-aligned is an economic activity if it

1. makes a substantial contribution to at least one environmental objective;
2. does no significant harm to any of the other five environmental objectives; and
3. complies with minimum safeguards.

To ensure that an economic activity substantially contributes to one of these objectives, while not doing significant harm to any of the other five objectives, the EU sets performance criteria (so-called “technical screening criteria”) in delegated acts.

The EU Taxonomy Compass visually presents the contents of the EU Taxonomy, facilitating easier access and understanding for diverse users.

Funds that are categorized under Art. 8 or Art. 9 #SFDR have to report on the Taxonomy alignment of their investments in reporting templates provided by the #RTS of the SFDR for pre-contractual and periodic disclosures. Financial entities that fall under the scope of the #CSRD had to report in their annual reports for 2022 on the Taxonomy-eligibility and will have to report for 2023 on both Taxonomy-eligibility and Taxonomy-alignment.

Does that mean that all Fund Managers of Art. 8 / 9 SFDR Funds need to collect data on Taxonomy-alignment?

Not necessarily:

The BaFin says there is no obligation to review every investment underlying a financial product for "taxonomy alignment" and to collect corresponding data for Art. 8/ 8+ SFDR funds.

Therefore, it is possible to indicate the taxonomy alignment with zero if

1. no data is collected at all, or
2. reasonable efforts to collect data were partially or completely unsuccessful.

However, there might be scenarios in which a fund investor is obliged to report in accordance with the CSDR and subsequently requests the inclusion of a side letter clause requesting the fund manager to collect taxonomy data on their behalf.