What the EU’s Taxonomy Climate Delegated Act means for fund managers

A lack of common understanding and clear definition of what are environmentally sustainable activities has created challenges for fund managers as they face more ESG reporting requirements. 

The EU is tackling these challenges with its new Taxonomy Climate Delegated Act (EU2021/2139), which was approved by the European Council on 9 December 2021.

The Act brings the new Technical Screening Criteria for climate change risks into EU law under the Taxonomy Regulation. It came into force on 1 January 2022, introducing disclosure obligations on companies and financial market participants with the first relevant reports expected in 2023.

This is the first time that a common understanding of which, and to what extent, activities are environmentally sustainable has been put into law. The Act is clearly a significant milestone for the EU’s sustainable finance goals following years of work and collaboration.

Creates common sustainability definitions

The EU Taxonomy creates a common language that fund managers can use when investing in projects and economic activities that have a substantial positive impact on the climate and environment.

It sets the criteria for climate change mitigation and adaptation objectives in more than 60 economic activities including renewable energy, car manufacturing, shipping, forestry and bioenergy.

It is effectively a science-based transparency tool, and the climate criteria are objective and technology-neutral. They have mainly been compiled by the Platform on Sustainable Finance – a permanent expert group of the European Commission established to assist the development of the EU’s sustainable finance policies.

Criteria on mitigation and adaption will help all businesses in the wider economy to align with the EU’s net-zero target and the Paris climate goals, including the EU’s target to cut emissions by 55% by 2030.

Helps funds managers meet ESG requirements

Companies and investors will now have common ground, allowing them to communicate credibly about green activities and help the transition towards sustainability. 

It will also give fund managers more confidence when allocating to green investments on behalf of investors. 

Further, the adoption of the Act allows investors and companies to start reporting against the EU Taxonomy to meet forthcoming disclosure requirements. These rules fall under the EU’s Sustainable Financial Directive Regulation (SFDR) and the Taxonomy Regulation, which are cornerstones of the EU’s Sustainable Finance Strategy.

The Act also gives the market an environmental performance benchmark by laying out thresholds. For example, it introduces a technologically neutral performance threshold for electricity generation in the energy sector of 100gCO2e/kWh for substantial contribution to climate mitigation.

This threshold will decline every three years until 2050 and will require carbon capture and sequestration as well as a life cycle measurement of emissions.

The Act also introduces a 270gCO2e/kWh electricity generation threshold for significant harm in the energy sector.

A second delegated act, describing how nuclear energy and gas will be labelled under the EU Taxonomy, is undergoing a separate consultation. It is expected to be passed into law in 2022 once the European Parliament and Council have scrutinised the document.

Choosing an ESG expert

The EU’s Taxonomy Climate Delegated Act will help fund managers to meet their wider sustainable investment disclosure requirements – but it will bring new challenges.

That is why choosing a provider with significant ESG expertise can help enormously. Apex Group provides many ESG services including compliance advisory and data gathering on carbon footprint.

Find out more about our ESG services by contacting us here