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Will the EU Taxonomy have a global impact?

Financial markets are globally intertwined, meaning the EU Taxonomy will reach beyond EU borders and likely require non-EU financial market players to complete their alignment screening.

Nicole Krämer

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The EU Taxonomy regulation officially hit the ground running in 2020, establishing a classification system of environmentally sustainable economic activities. Packaged together with the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD), which is set to replace the current Non-Financial Reporting Directive (NFRD), the EU Taxonomy calls for financial institutions and corporates to screen, assess and report on the extent to which their investments and undertakings are environmentally sustainable and aligned with the regulation. 

While the EU Taxonomy aims to help implement the European Green Deal and push EU financial institutions and companies to make more environmentally sound decisions, it will have an impact on entities beyond the EU. At the same time, with the rapid increase of green taxonomies across the globe, the EU Taxonomy is already viewed as a potential reference point or benchmark. 

The Extraterritoriality of the EU Taxonomy

Financial markets are globally intertwined, and many EU entities operate outside EU borders – automatically extending the scope of the EU Taxonomy. For EU financial market players to provide a complete and transparent EU Taxonomy screening, they will likely reach out to their non-EU undertakings to collect EU Taxonomy aligned data. Non-EU investors or financial advisors offering products in Europe are already subject to the SFDR, which requires the alignment of investment products with the EU Taxonomy.

Similarly, the upcoming CSRD, which will also ensure alignment with the EU Taxonomy, aims to expand its scope and proposes to cover non-EU companies with subsidiaries in the EU and non-EU companies with transferable securities listed on the EU regulated markets. To ensure reporting consistency, the European Financial Reporting Advisory Group (EFRAG) will work with international sustainability reporting initiatives.

Switzerland, for example: is closely linked with the European financial market given its geographical positioning, but also its role as a global financial marketplace. Swiss companies that plan to sell financial products and services to EU customers will, therefore, be impacted by the EU Taxonomy. While there are currently no plans for a Swiss Taxonomy, the country aims to become an international sustainable finance centre and is carefully observing regulations coming out of the EU as well as those being developed globally. Financial players are already applying the Task Force on Climate-related Financial Disclosures (TCFD) and the country is currently looking to develop binding parameters for its implementation. 

It is consequently important that non-EU entities become informed and are aware of the impact the EU Taxonomy may have on them. At the same time, they should also keep in mind that the EU Taxonomy and related directives, while seemingly overwhelming at this stage, aim to establish consistency and clarity regarding sustainable activities, and will in turn provide several benefits for these players. Non-EU financial market participants could:  

  • Allow for and gain greater transparency
  • Make informed decisions on environmentally sustainable activities
  • Unlock sustainable finance flows from EU entities and vice versa
  • Access European capital markets
  • Contribute to and accelerate the transition to a low-carbon economy
  • Become an ‘early mover’ – prepare for their national taxonomies or a global taxonomy
  • Increase the resilience of their business and operations
  • Mitigate ‘greenwashing’

The Interoperability of Taxonomies across the Globe  

Beyond this, we are also observing a global proliferation of green taxonomies. Many countries are adopting or have adopted their own taxonomy frameworks, including China, the UK,  South Africa and Colombia, which both launched their respective green taxonomies in April, 2022.

While the EU Taxonomy is a reference point for many countries, additional elements will be included to reflect national specificities and priorities. The framework of the UK Taxonomy, for example, draws on that of the EU (to which the UK contributed as a former Member). This is great news, as it means that firms screening their ESG data for their EU counterparts will be able to use the overlapping data to comply with their local taxonomy when it is adopted.

To further advance the harmonisation across taxonomies and global sustainable finance regulatory measures in general, the International Platform on Sustainable Finance (IPSF) was established by countries in 2019. The multilateral forum facilitates the exchange of information and dialogue between public authorities responsible for advancing member countries’ sustainable finance measures or initiatives. Members can share best practices, challenges and opportunities and are free to coordinate and warrant the consistency and alignment between respective sustainable finance frameworks.

In this context, the EU and China initiated a Working Group on taxonomies in 2020, to collaboratively assess their respective taxonomies and identify similarities and differences in their approach. This work resulted in the IPSF Common Ground Taxonomy (CGT), a report looking to deepen global collaboration and reduce fragmentation across green taxonomies. The CGT can be used to enhance comparability and interoperability. It is shaping to be an analytical tool to help relevant stakeholders better understand what aspects and activities could be considered in their own taxonomies. 

Other stakeholders are also actively engaged in supporting countries with the development of their green taxonomies. The World Bank, for example, has established a guide to developing national green taxonomies for emerging markets, to provide clarity and help entities to structure their green products. 

Greenomy’s Role and our Global Outreach 

Greenomy helps corporates, credit institutions and asset managers comply with the new EU Sustainable Finance Regulations (EU Taxonomy, SFDR, NFRD/CSRD) by digitalizing the data capturing and reporting process. Aiming to reach beyond EU borders and allow for global coverage, Greenomy is gradually integrating other non-EU Green Taxonomies into its platform to offer users a one-stop solution for their global operations. We are part of the FCA Regulatory Sandbox, for instance, and aim to integrate the UK Green Taxonomy criteria for climate change mitigation and adaptation objectives, once these are finalised.

We have also established Advisory Services to support the emergence of other taxonomies throughout the world. By leveraging our experience with the EU Taxonomy, our goal is to help countries by developing a tailored classification system to create a clear common language around green activities locally but also around the world to allow interoperability between the different taxonomies. We then develop the infrastructure to support the implementation of the local taxonomy and ensuring its deployment and rollout in the real economy. Greenomy aims to become a gateway between the various national taxonomies currently being established and will provide a transition and functional database that maps and considers global requirements. 

Greenomy’s EU Taxonomy Solution aims to support investors, companies, financial institutions and auditors through the process and make sustainability reporting easy and cost-effective. Get in touch to learn more about how Greenomy can help you comply or if you wish to book a demo.


 

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