The purpose of the EU Taxonomy Regulation, currently the subject of intense debate, is to provide businesses, financial market players, and investors with guidance that defines which investments are considered sustainable, describing more than 200 industries and economic sectors.
Sustainability is on everyone’s mind, and so is the EU Taxonomy Regulation. To date, Regulation (EU) 2020/852 (its official name) has been discussed in the media almost exclusively in connection with the issue of whether nuclear power and natural gas should be assessed positively as energy sources in terms of sustainability. It has somewhat moved to the background that the actual purpose of the Regulation is to provide businesses, financial market players, and investors with a guide that defines which investments are considered sustainable.
The Regulation refers broadly to the “European Green New Deal,” by which the European Union aims to achieve climate neutrality by 2050. A January 1, 2022, EU press release states, “The EU Taxonomy guides and mobilises private investment in activities that are needed to achieve climate neutrality in the next 30 years.” On that day, EU Regulation 2020/852 partially entered into force; whether nuclear power and natural gas as energy sources will be assessed as sustainable is yet to be decided.
Even prior to that decision, however, the Taxonomy Regulation provides a valuable compass for businesses and investors who have committed to operating in an environmentally sustainable manner under their self-imopsed ESG rules. The catalog that is comprising more than 1,000 pages not only sets out very specific criteria for various industries, but also defines six environmental objectives as a basic benchmark:
The criteria for the first two environmental objectives have already been defined. Criteria for the next three objectives are to be added in the course of 2022, and the adoption of the entire catalog is scheduled for the end of the year. The EU Regulation also stipulates that an activity or investment is only considered sustainable if, in addition to making a positive contribution to one of the objectives, none of the other five objectives is significantly impaired at the same time.
But what does the EU Taxonomy Regulation mean specifically for investors and providers of financial products such as bonds and certificates on indices? In the case of bonds and certificates that are unequivocally designated as sustainable, the activities of the relevant companies must meet the EU Regulation’s criteria. Investors who attach importance to investing in an environmentally responsible and sustainable manner should therefore make sure that the financial products they intend to acquire relate to businesses that operate in accordance with the criteria of the Regulation.
The Regulation therefore becomes an important ESG building block for companies that commit to CSR for sustainable development and implement it in their corporate policies.