The EU Taxonomy: what is the impact for investors and corporates?

Learn more about the new EU standards to support businesses in their transition journeys, with Jeanne Aing, Head of CIB SREP and Regulatory Anticipation.


What is the EU Taxonomy and how can it support the environmental transition?

The EU taxonomy is a classification system that tells you whether certain types of business activities are green. The current EU taxonomy includes 13 sectors and more than 100 business activities, and is set to expand.

The taxonomy aims to create security for investors, protect them from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments to where they are most needed to facilitate the transition.

The EU taxonomy provides market participants and policymakers with a common language and a clear definition of what is sustainable. As such, it’s a game changer.

Jeanne Aing, Head of CIB SREP and Regulatory Anticipation

What is the Taxonomy Regulation?

The Taxonomy Regulation published in 2020 establishes six environmental objectives:

  • Climate change mitigation,
  • Climate change adaptation,
  • The sustainable use and protection of water and marine resources,
  • The transition to a circular economy,
  • Pollution prevention and control, and
  • Protection and restoration of biodiversity and ecosystems.

Under this regulation, the European Commission published its first set of “technical screening criteria” detailing the economic activities that contribute to climate change mitigation and adaptation.

The economic activity must fulfill four criteria in order to be considered “environmentally sustainable”:

  • Complies with the Technical Screening Criteria (TSC), determining its eligibility,
  • Substantially contributes to one or more environmental objective,
  • Does not significantly harm (DNSH) any other environmental objective,
  • Complies with minimum social safeguards.

What does it mean for corporates? How will they need to respond?

From January 1 2022, companies currently subject to the Non-Financial Reporting Directive (NFRD) will begin to disclose the portion of their activities that qualify as “environmentally sustainable” under the Taxonomy Regulation. A larger number of companies will begin reporting under the Corporate Sustainability Reporting Directive (CSRD), which replaces the NFRD, for the financial year starting on or after January 1, 2023.

Corporates will be required to disclose the proportions of turnover, capital expenditure and operating expenditure linked to at least one of the six environmental objectives (by referring to the appropriate TSC); how they do no significant harm to the remaining environmental criteria; and how they meet minimum social and governance safeguards.

Companies need to consider the taxonomy and its potential impact on their frameworks, systems and reporting requirements. They should start to consider whether and how their activities align with the taxonomy and the data required to prepare for relevant disclosures.

How will this impact corporate financing?

The EU taxonomy offers companies an opportunity to measure their performance and progress towards delivering the environmental objectives in a transparent and comparable manner. A good alignment with the Taxonomy could improve companies’ reputation and therefore access to finance, making them more attractive to banks and investors.

How will investors and credit institutions use the taxonomy?

Asset managers and investment firms are required to disclose Key Performance Indicators that show the degree of alignment of their portfolio with the taxonomy. Banks will also be required to disclose their Green Assets Ratios (GAR).

Financial market participants in the EU that are subject to the Sustainable Finance Disclosure Regulation (SFDR) are required to disclose the extent of their alignment with the EU taxonomy for investment products falling under article 8 (investments products promoting environmental or social characteristics) and article 9 (sustainable investment products) of the SFDR.

The taxonomy will also act as a powerful tool to support decision-making on investments.

What is the impact of the EU taxonomy on businesses located outside Europe?

The EU taxonomy will impact non-EU companies, given the global nature of financial markets and trade flows. For example, a non EU-investor or financial advisor offering products in Europe is subject to the SFDR, which requires alignment with the EU taxonomy of investment products. In addition, a non-EU company with EU-based investors will likely be required by these investors to provide information about the company’s alignment with the EU taxonomy.

Why is the taxonomy important for BNP Paribas?

The EU taxonomy framework will help scale down reputational and environmental risks through harmonised reporting, directly impacting stakeholders’ perceptions. It creates opportunities to generate additional value and differentiate ourselves from our peers, leading to stronger trust and partnerships with our clients and employees.

Given the urgency of climate change, we are focused on accompanying our clients in their transition to more sustainable activities and ensuring that capital is directed towards the right projects and investments.

BNP Paribas has pledged to align its financing and investment portfolios with the necessary trajectory for achieving carbon neutrality by 2050 by joining the Net-Zero Banking Alliance (NZBA). To make net-zero happen, we will need accurate numbers and metrics, and the EU taxonomy is a helpful tool to achieve those targets.

What’s coming up next in terms of regulation around the taxonomy?

By 31 December 2021, the Commission is expected to publish a report on the extension of the taxonomy’s scope to cover economic activities that do not have a significant impact on environmental sustainability, those that significantly harm environmental sustainability and other sustainability objectives, such as social ones. In 2022, work will be focused on this expansion of scope.

We are also seeing other countries following suit by designing their own taxonomies, such as the UK, Canada, China and Japan.

Convergence of green finance standards at the international level would be welcome but it will take time. We are starting to see this come to the fore. At COP26, we saw the publication of the Common Ground Taxonomy (CGT), a report detailing analysis of commonality between the EU and China’s taxonomies. It will be interesting to see the extent to which this lays the foundations for work on closer international alignment.

Green is the new gold (standard)!

According to the European Commission, the EU is a global leader in green bond issuance, with EU companies and public bodies accounting for 51% of global issuance in 2020 and 49% of global green bond issuance denominated in euros. Nevertheless, current green bond issuance in the EU still accounts for just a small percentage of total EU bond issuance, at 2.6%. Further growth in high-quality green bond could be a source of significant green investment, helping to meet the European Green Deal targets. According to the Climate Bonds Initiative, at a global level, green bond issuance amounted to $300 billion, representing only 4% of total corporate bonds issuance in 2020.

The proposed EU green bond standard (EU GBS) aims to provide standardisation, transparency and involves external reviewers that provide assurances to issuers and investors on the greenness of their investments (and are supervised by ESMA). Use of the EU green bond label will be voluntary and open to any EU or non-EU issuer.

Only projects that are in line with the EU taxonomy would be eligible for funding, and issuers would need to provide additional information at the time of issuance, and through regular reporting on the use of proceeds and its impact.

Green bond issuance by the European Commission under the Next Generation EU (NGEU) programme is likely to amount to €250 billion over the next three years, roughly equal to total global issuance of green bonds in 2020, as mentioned by the EC.

For more information, please contact:

  • Jeanne Aing, Head of CIB SREP and Regulatory Anticipation
  • Patrick Bader, EU Taxonomy Coordinator and EU Platform for Sustainable Finance member, representing BNP Paribas