EU Taxonomy, SFDR, and European Green Bond Verification

What is the EU Taxonomy?

The EU Taxonomy is a classification system introduced by the European Union to define and categorize economic activities based on their environmental sustainability. It sets out a common framework of criteria and thresholds to determine whether an activity can be considered environmentally sustainable or “taxonomy-aligned” in areas such as climate change mitigation, adaptation, circular economy, pollution prevention, and biodiversity. This taxonomy aims to provide transparency and clarity for investors, businesses, and consumers, encouraging investments and economic activities that contribute to the EU’s environmental objectives and the transition to a sustainable economy.

The EU Taxonomy allows both financial and non-financial companies to adopt a shared definition of economically sustainable activities that are considered environmentally sustainable. It plays a crucial role in scaling up sustainable investments within the EU by providing security for investors, protecting them from greenwashing practices, assisting companies in becoming more climate-friendly, and mitigating market fragmentation.

The Taxonomy Regulation sets six climate and 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
• The protection and restoration of biodiversity and ecosystems.

Types of Funds Required for EU Taxonomy Compliance

• EU Taxonomy disclosures apply to Article 8 funds that emphasize environmental characteristics. These funds are obligated to explain how and to what degree their underlying investments meet the environmental goals outlined in the EU Taxonomy.
• EU Taxonomy disclosures are also relevant for Article 9 funds, which focus primarily on sustainable investments or carbon emission reduction. These disclosures specifically apply to Article 9 funds with defined environmental objectives.

How to demonstrate compliance with EU Taxonomy requirements?

To demonstrate compliance with EU Taxonomy requirements, financial market participants and companies can take the following steps:

• Conduct an assessment: Evaluate your activities, products, or investments to determine their alignment with the EU Taxonomy criteria and where relevant, SFDR or Green Bond requirements. Assess the economic activities you engage in and their environmental performance against the specific thresholds and requirements defined in the taxonomy regulation.
• Disclosure and reporting: Prepare and disclose transparent and accurate information about the sustainability characteristics of your activities or investments. This includes providing relevant data, metrics, and evidence that demonstrate compliance with the taxonomy requirements. Reporting can be done through standardized templates or frameworks, such as the EU Taxonomy-aligned disclosures. For SFDR, this includes reporting on sustainability risks and adverse impacts
• Documentation and record-keeping: Maintain comprehensive documentation and records that support your claims of compliance with the EU Taxonomy. This includes gathering relevant data, methodologies, and assumptions used in assessing the environmental sustainability of your activities. These records should be available for audit and verification purposes.
• Independent assurance and verification: Consider engaging an independent third party to conduct an assurance or verification process of your compliance with the EU Taxonomy, SFDR, or European Green Bond requirements. This can enhance credibility and provide additional assurance to investors, stakeholders, and regulators.

Expanding Beyond Taxonomy: SFDR and European Green Bonds

In conjunction with the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR) introduces standardized disclosure requirements for financial market participants.. Similarly, the European Green Bond framework establishes standards for green bond issuance, setting forth requirements for issuers to allocate funds to taxonomy-aligned projects.

• Sustainable Finance Disclosure Regulation (SFDR)
  SFDR aims to enhance transparency around sustainability risks and impacts, enabling investors to make informed decisions and reducing the risk of greenwashing. By imposing rules on disclosing ESG-related information, SFDR allows for easier comparison of financial products within the EU and promotes accountability in sustainable finance.

• External Reviewers of European Green Bonds
  First, by relying on the detailed criteria of the EU Taxonomy, this European Green Bonds (EuGB) standard will ensure that funds raised by these bonds are spent on truly green economic activities, with high levels of transparency. This means that investors buying a European Green Bond will benefit from the assurance that the proceeds of that bond are allocated to green projects that align with the detailed and well-known requirements of the EU Taxonomy. 

External reviewers like us provide an independent opinion on whether an issuer of European Green Bonds complies with the Taxonomy requirements of the European Green Bonds Regulation. 

To issue a European Green Bond, an issuer must use an external reviewer:

• before the issuance of a European Green Bond (‘pre-issuance review of European Green Bond factsheet’) and;
• after the full allocation of its proceeds ‘(post-issuance review of allocation report’).

As independent certification body, BM Certification can conduct 3rd party audits regarding the fulfillment of above environmental sustainability criteria. For those workin in forestry BM Certification offers EU Taxonomy technical screening criteria, DNSH criteria, and Minimum safeguards criteria 1.3. in activity: Forest management.

Contact BM Certification to discover more about our services and explore how we can assist you in navigating EU Taxonomy and other compliance. Together, let’s shape a greener and more sustainable future.