European Union Taxonomy – A New Driver for Sustainability and ESGWhile the concept of Environmental, Social, and Governance (ESG) value has been discussed in the financial community for several decades, the last 12-18 months has seen an explosive growth in interest. Driven primarily by the rapidly escalating climate crisis, but also underpinned by concerns around biodiversity, social inclusion and equality, and sustainable resource use, ESG has moved from niche to mainstream. This interest has given birth to an ecosystem of government decrees, service providers, professional committees, and reporting frameworks, as the financial community strives for a reliable and consistent method to factor ESG into company valuations. The European Commission has recently released the Taxonomy Climate Delegated Act and Amendments to Delegated Acts on fiduciary duties, investment, and insurance advice (Yes, the EU has a talent for snappy titles). This provides a framework for the evaluation of ESG performance and for consistent labeling of green investment products. Users of the taxonomy can screen and evaluate organizations based on the activities they undertake and establishes minimum standards that must be met in order to be considered sustainable, or in the jargon, taxonomy-aligned. It will apply for financial institutions from 1-January 2022 and will be applicable for corporates from October 2022. Disclosure obligations of the EU Taxonomy explained apply to entities subject to the scope of the EU Non-Financial Reporting Directive (essentially medium and large companies publicly listed in the EU) and to all their activities regardless of their location. The Taxonomy will create international influence despite there being no intention to bind third countries on their own sustainability or sustainable finance activities. The U.S. Securities and Exchange Commission (SEC) recommended a similar approach and recommendations, and the U.S. Department of Labor is considering options. Reporting of alignment is done on a legal basis, meaning legal entities can assess and report the percentage of activities that are Taxonomy-aligned, expressed as the share of their turnover or expenditures (capital and operational).
EU Taxonomy ExplainedIn order to be recognized as taxonomy-aligned for the EU Taxonomy Regulation, an activity must meet four conditions:
Make a substantial contribution to at least one of the six environmental objectives:climate change mitigation, climate change adaptation, sustainable use of water and marine sources, circular economy, pollution prevention, and healthy ecosystems and biodiversity;
Do no significant harm to any of the other environmental objectives;
Comply with minimum social safeguards; and
Comply with the technical screening criteria.
Benchmark Gensuite® supports this requirement in a number of ways:
- A structured framework for materiality assessment, ensuring that the reporting program addresses issues that are important to the organization, and to its host community;
- Clear, consistent, and auditable processes for data collection and processing, across the enterprise;
- Specialized tools for Sustainability and ESG-specific aspects, such as carbon accounting, management of sustainability project portfolios, and management of financial instruments (eg. Renewable Energy Certificates);
- Integrated edge-technologies such as Bluetooth beacons, smart glasses and sensors to automate data collection, and manage large data volumes;
- Real-time visibility of data quality, gaps, and inconsistencies; and
- AI, Machine Learning, and Analytical capabilities, to derive real insight from data and ensure focus on material issues that warrant investment.