COMMISSION EUROPÉENNESECRÉTARIAT GÉNÉRALDirection B – GreffeCOM(2021) 188Bruxelles, le 14 avril 2021RSCPROCÉDURE ORALETEXTE ENCommunication from the Commission to the European Parliament, theCouncil, the European Economic and Social Committee and the Committeeof the RegionsEU Taxonomy, Corporate Sustainability Reporting, SustainabilityPreferences and Fiduciary Duties: Directing finance towards the EuropeanGreen DealCommunication de Mme McGUINNESS, en accord avec M. DOMBROVSKISCette question est prévue à l'ordre du jour de la 2374ème réunion de la Commission lemercredi 21 avril 2021.* EGRP -2021-00003187*

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PO/2021/2734DÉCISION PROPOSÉE AUX MEMBRES DE LA COMMISSION : approuver cette communication ;transmettre au Parlement européen, au Conseil, au Comité économique et social européen, auComité des régions ainsi que, pour information, aux parlements nationaux.Info-point PUBLICATION – tél. 32 229-88855 – e-mail : [email protected] CERTIFICATION/NOTIFICATION – tél. 32 229-88866 – e-mail : [email protected]

EUROPEANCOMMISSIONBrussels, XXXCOM(2021) 188COMMUNICATION FROM THE COMMISSION TO THE EUROPEANPARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIALCOMMITTEE AND THE COMMITTEE OF THE REGIONSEU Taxonomy, Corporate Sustainability Reporting, Sustainability Preferences andFiduciary Duties:Directing finance towards the European Green DealENEN

COMMUNICATION FROM THE COMMISSION TO THE EUROPEANPARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIALCOMMITTEE AND THE COMMITTEE OF THE REGIONSEU Taxonomy, Corporate Sustainability Reporting, Sustainability Preferences andFiduciary Duties:Directing finance towards the European Green DealEXECUTIVE SUMMARYThe European Green Deal is Europe’s growth strategy that aims to improve the well-being andhealth of citizens, make Europe climate-neutral by 2050 and protect, conserve and enhance theEU’s natural capital and biodiversity. An Economy That Works For People also means a justTransition that creates employment and leaves no one behind. To achieve these goals, theEuropean financial system needs to become more sustainable. This will require both robustfinancial legislation and a clear transition path for businesses. The scale of investment neededto bring about the necessary changes will put the European financial sector at the heart of asustainable and inclusive economic recovery from the COVID-19 pandemic and of the longterm sustainable economic development of Europe.The EU has taken major steps to build a sustainable finance ecosystem. The EU TaxonomyRegulation, the Sustainable Finance Disclosure Regulation and the BenchmarkRegulation form the foundation to increase transparency and provide tools for investors toidentify sustainable investment opportunities.The Commission is putting forward the EU Taxonomy Climate Delegated Act, a proposal fora Corporate Sustainability Reporting Directive, revising the Non-Financial ReportingDirective, and amendments to delegated acts to better reflect sustainability preferences ininsurance and investment advice and sustainability considerations in product governance andfiduciary duties. They will help drive a greener, fairer, and more sustainable Europe andsupport the implementation of the Sustainable Development Goals.The EU Taxonomy is a robust, science-based transparency tool for companies and investors.It introduces clear performance criteria for determining which economic activities make asubstantial contribution to the Green Deal objectives. These criteria create a common languagefor businesses and investors, allowing them to communicate about green activities withincreased credibility and help them to navigate the transition already under way. The EUTaxonomy will also play an important role in creating the EU Green Bond Standard and theEU Ecolabel for certain retail financial products.Through the EU Taxonomy Climate Delegated Act, the economic activities of roughly 40% oflisted companies,1 which are responsible for almost 80% of direct greenhouse gas emissions in1Share of EU domiciled companies with more than 500 employees active in economic sectors covered by the EUTaxonomy Climate Delegated Act (Source: Bloomberg)1

Europe, are already covered, with more activities to be added in the future.2 Through this scope,the Taxonomy can significantly increase the potential that green financing offers to supporttransition, in particular for carbon-intensive sectors where change is urgently needed.The proposal for the Corporate Sustainability Reporting Directive will set commonEuropean reporting rules that will increase transparency, requiring companies to reportsustainability information in a consistent and comparable manner. The new reportingrequirements would apply to all large and all listed companies, including listed small andmedium-sized enterprises (SMEs). The Commission also intends to develop proportionate,voluntary reporting standards for SMEs that would not be subject to reporting requirementsunder the Directive.I.INTRODUCTIONRegulation (EU) 2020/852 on the establishment of a framework to facilitate sustainableinvestment (the “EU Taxonomy Regulation”), entered into force on 12 July 2020 3. Throughthis Regulation, the Council and the European Parliament mandated the EuropeanCommission to provide, in delegated acts, technical screening criteria for determiningwhether an economic activity can be considered as contributing substantially toenvironmental objectives. Making a substantial contribution and causing no significant harm,along with meeting minimum social safeguards defined in the Taxonomy Regulation,4 serve toqualify an activity as ‘environmentally sustainable’, in other words green, for investmentpurposes. These criteria help establish appropriate definitions for companies, investorsand financial market participants on which economic activities can be consideredenvironmentally sustainable.This mandate is framed by the requirement that technical screening criteria need to be up todate and based on scientific evidence. These criteria must be clear, practicable and easy toapply, thus avoiding unnecessary administrative burden. The European Parliament and theCouncil have also recognised the importance of public consultation, and explicitly mandatedthe Commission to involve relevant stakeholders and to build on the advice of experts whohave proven knowledge and experience in the relevant areas.Acting on this request by the co-legislators, the Commission has adopted the EU TaxonomyClimate Delegated Act5, in order to provide the first set of technical screening criteria of the2Source: EurostatRegulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishmentof a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088, OJ L 198.4As announced in the Communication from the Commission to the European Parliament, the Council, theEuropean Economic And Social Committee and the Committee of the Regions on The European Pillar of SocialRights Action Plan, COM(2021) 102 final, 4 March 2021, p. 35.5Commission Delegated Regulation supplementing Regulation (EU) 2020/852 of the European Parliament andof the Council as regards establishing the technical screening criteria for determining under which conditions aneconomic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation32

EU Taxonomy and a common language around sustainable activities. The EU TaxonomyRegulation requires that investors and companies use these criteria for related disclosures,which will also serve as a reliable guide for investment decisions.This is complemented by the proposal for the Corporate Sustainability Reporting Directive6,which will ensure that companies provide information on the sustainability of their businesspractices in a transparent and comparable manner. Through information on taxonomyalignment, transition investments and sustainability risks, financial companies can evaluate theambition and environmental performance of financed activities.II.THE EU TAXONOMY CLIMATE DELEGATED ACTThe EU Taxonomy Climate Delegated Act adopted by the Commission, subject to scrutiny bythe European Parliament and the Council, delivers the first set of technical criteria fordefining those activities that contribute substantially to climate change mitigation andadaptation, the first two out of six environmental objectives in the EU Taxonomy 7.These criteria have been developed based on recommendations by the Technical Expert Group(TEG) and following public feedback and advice by the Platform on Sustainable Finance. Theyreflect the ambition of the EU Green Deal and take account of the practical needs of Europeancitizens, businesses and investors.The volume of feedback received from stakeholders (including citizens, public authorities,businesses, non-profit organisations, and academia amongst others) reflected the importanceof the issue. The vast majority of respondents reiterated the importance of the Taxonomy as akey tool supporting the process of transition under the European Green Deal. The full summaryof the outcome of the public feedback is available on the Commission’s sustainable financewebsite [link].The feedback also revealed several concerns, including: On the implications of an activity qualifying as environmentally sustainable ornot: some stakeholders were concerned that an activity not qualifying as green underthe EU Taxonomy Climate Delegated Act risks being perceived as unsustainable, withpossible consequences in terms of access to finance for those activities. (Section 1)and whether an economic activity causes significant harm to any of the other environmental objectives (‘EUTaxonomy Climate Delegated Act’), formal adoption will take place in the near future.6Proposal for a directive amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC andRegulation (EU) No 537/2014, as regards sustainable corporate reporting by certain undertakings COM (2021)189.7Article 9 of the EU Taxonomy Regulation specifies the following six environmental objectives: (a) climatechange mitigation, (b) climate change adaptation, (c) the sustainable use and protection of water and marineresources, (d) the transition to a circular economy, (e) pollution prevention and control, (f) the protection andrestoration of biodiversity and ecosystems.3

On the level of ambition and usability of criteria: while many stakeholderswelcomed the level of ambition of the criteria or even called for higher ambition, otherstakeholders were concerned that the ambition of the criteria was too high, andsuggested improvements in the usability of criteria. (Section 2) On the scope of the EU Taxonomy: some stakeholders were concerned about thescope of activities covered by the criteria being too narrow and the binary nature of theEU Taxonomy, which means it will not provide guidance to markets on how to dealwith activities that do not meet, or are not covered by, the criteria listed in the DelegatedAct. (Section 3)The following three sections clarify the issues above and explain the steps the Commission hastaken, or will take in the future, to address them.1. The implications of an activity qualifying as ‘environmentally sustainable’ or notMany stakeholders were concerned that the taxonomy defines which activities qualify as‘environmentally sustainable’, which could be taken to mean that if an activity is not addressedin the delegated act it would automatically qualify as environmentally ‘unsustainable’. This isnot the case. The mere fact that a company does not have Taxonomy-aligned activities doesnot mean that conclusions can be drawn regarding the company’s environmental performanceor its ability to access finance.The Taxonomy does not currently define how activities other than green are to be treated. Itdoes not define or categorize any activities as ‘improving the current levels of environmentalperformance’ but not reaching the level of substantial contribution. These activities – whileimportant in their own right to support the necessary broad transformation of the EU economy– will in themselves not be sufficient to reach our green objectives. Similarly, the Taxonomydoes not define or categorize any activity as ‘environmentally unsustainable’. Also, not allgreen activities that can make a substantial contribution to the environmental objectives are yetcovered by the EU Taxonomy Delegated Act and thus part of the Taxonomy. The taxonomy isa living document that will be added to over time and updated as necessary.The EU Taxonomy is a transparency tool. It will introduce disclosure obligations on somecompanies and financial market participants, requiring them to disclose their share ofTaxonomy-aligned activities. The disclosure of the proportion of Taxonomy-aligned greenactivities will allow the comparison of companies and investment portfolios based on thisproportion. Companies, if they wish, can reliably use the EU Taxonomy to plan their climateand environmental transition and raise financing for this transition. Financial marketparticipants, if they wish, can use the EU Taxonomy to design credible green financialproducts. It is expected that the taxonomy will be an enabler of change and encourage atransition towards sustainability. However, while the Taxonomy can guide market participantsin their investment decisions, naturally it does not prohibit investment in any activity There isno obligation on companies to be Taxonomy-aligned, and investors are also free to choose whatto invest in.4

The taxonomy framework will increase access to sustainable financing beyond currentlyexisting market-based green finance tools. It includes more economic activities and moreenvironmental objectives than have been used so far in market-based green financingframeworks. Notably, it includes some carbon-intensive sectors, enabling market recognitionfor transitioning activities within those sectors.Companies will be able to count not only turnover, but also certain expenditure as taxonomyaligned, which will further broaden the opportunities the Taxonomy will offer. For example, acement manufacturing plant which sets out an investment plan to reach the performance levelof the taxonomy could count capital expenditure committed as part of the plan as taxonomyaligned. Estimates and early testing of the climate taxonomy criteria showed a low overalltaxonomy alignment today in companies’ activities and investment portfolios (between 1% and5%, with many companies and investment portfolios standing at zero). While this figure isexpected to rise significantly with the implementation of the Green Deal, it highlights the extentof the transition still required towards carbon neutrality by 2050.The EU Taxonomy is designed for the specific purpose of providing a classification systemand improving transparency. Other EU policies may use or be inspired by some elements ofthe EU Taxonomy without applying the criteria defined in the Taxonomy Climate DelegatedAct. Examples of initiatives using some elements of the Taxonomy Regulation are theRecovery and Resilience Facility (RRF) and Cohesion Policy. The RRF Regulation uses the‘do no significant harm’ principle of the Taxonomy Regulation enshrined in Article 17 butwithout requiring the use of the criteria defined in the Taxonomy Delegated Acts. TheCommission published dedicated technical guidance,8 providing more detail on how to applythe ‘do no significant harm’ principle for the purposes of the RRF. This means that the criteriadefined in the Taxonomy Climate Delegated Act do not have any direct binding implicationfor the implementation of the RRF. The Cohesion Policy regulation also requires that theobjective of its funds must use the “do no significant harm” principle of the TaxonomyRegulation in the 2021-2027 programming period, but without requiring the use of the criteriaof the Taxonomy Delegated Acts.2. The level of ambition and usability of criteria in the EU Taxonomy Climate DelegatedActIn designing the delegated acts to define criteria for economic activities, the EuropeanCommission is bound to comply with the mandate provided for by the European Parliamentand the Council to identify the level of ambition needed for green projects to reach the EU senvironmental objectives.The EU Taxonomy recognises as sustainable those activities that make a substantial, ratherthan a marginal, contribution to reaching EU environmental objectives. The EU Taxonomy setsCommission Notice on Technical guidance on the application of “do no significant harm” under the Recoveryand Resilience Facility Regulation, Brussels, OJ C58 of 18.02.2021, 12 February 2021.85

the criteria for substantial contribution and no significant harm based on the level of ambitionof the goals of the EU Green Deal.Based on careful examination of the feedback received, modifications have been made,compared to the draft delegated act published for public feedback, to improve the usability ofthe criteria while safeguarding the level of ambition of the EU Green Deal objectives. Some ofthose changes are as follows: numerous clarifications to bolster the technical accuracy and usability of the criteria further improvements in usability in terms of simplifying criteria, reducing complexityand overall burden and, where appropriate, adjustments to make them more specificand flexible) clarifications to better reflect subsidiarity and shared competence between EU andMember State levels where appropriate (including several clarifications to better takeinto account national regulations) improved consistency with existing frameworks, sectoral legislation, and considerationof the upcoming reviews where appropriate specifications to the scope of some transitional and enabling activities and adjustmentsto make the taxonomy more usable by economic actors spelling out better a small number of activities that were covered as part of anotheractivity, where there was a clear demand from stakeholders and where they areconsistent with the objectives and requirements of the EU Taxonomy Regulation updated recitals underlining the need for future reviews and the introduction ofadditional activities laterA summary of the feedback received and a more comprehensive list of the improvementsintroduced can be found here.3. The scope of the EU TaxonomyFollowing the public feedback and taking into account recommendations by the Platform onSustainable Finance, the Commission is considering further developments of the EUTaxonomy in accordance with the Taxonomy Regulation to address the remaining stakeholderconcerns.In particular, the current scope of the criteria outlined in the EU Taxonomy Climate DelegatedAct will expand in the future. The criteria are dynamic and will be subject to regular review.This ensures that new sectors and activities, including transitional and enabling activities, maybe added to the scope over time by amending this delegated act. In addition, another EUTaxonomy Delegated Act will focus on activities making a substantial contribution to the otherfour environmental objectives; the Platform on Sustainable Finance is working onrecommendations for this Act. Stakeholders will have the opportunity to suggest activities tobe included in the criteria via a web portal, which will be established in mid-2021 on theEuropean Commission website. The Commission, with inputs from the Platform onSustainable Finance, will assess the suggestions.6

The Commission will also reflect on concerns some stakeholders raised about the binary natureof the Taxonomy and on the treatment of economic activities that are either not covered by thecriteria, or do not meet the criteria. Possible ways to address these issues are being assessed inthe on-going work of the Platform on Sustainable Finance. The latter will provide theCommission with advice to feed into the report required under Article 26 of the TaxonomyRegulation. That Article requires the Commission to assess by the end of 2021 whether andhow the scope of the Taxonomy Regulation could be extended to cover other levels ofenvironmental performance than substantial contribution, as well as other objectives, such associal objectives.III.FINANCING THE TRANSITION TO SUSTAINABILITYThe transition to a sustainable economy is not a one-off event but a process. For companies,transition means to reduce carbon emissions and harm over time. For investors, transitionmeans to improve the environmental performance of a portfolio over time. Members Statesmay also plan and incentivise transition for certain sectors and the economy as a whole.All companies can invest in green activities. As part of their corporate strategy, companies canuse the EU taxonomy to make plans to transition specific activities to meet taxonomythresholds. Other science-based metrics may help them to set sustainability performance targetsfor the company as a whole. The Taxonomy Climate Delegated Act and the CorporateSustainability Reporting Directive are two important tools among others that help navigate thetransition.Companies currently without any Taxonomy-aligned activities can decide to plan and financeprojects that either upgrade an existing activity to meet taxonomy criteria, or to set up a newactivity that is taxonomy aligned. What counts is the environmental performance of the activity,which facilitates the gradual transition of a company as a whole.The Taxonomy also aims to provide incentives to investors to finance transition projects. Byclearly defining what is recognised as green, the Taxonomy aims to incentivise and inspirecompanies to launch new projects, or upgrade existing ones, to meet these criteria. Thetaxonomy will not block funding for activities that do not fulfil the taxonomy criteria.While there are different ways to transition, the Taxonomy Regulation defines a series ofactivities as ‘transitional activities’ in a very specific way and within strictly-defined legalboundaries9. These are greenhouse gas intensive activities with a large potential for emissionsreductions. the criteria must ensure that such ‘transitional activities’ make a substantialcontribution to the climate objectives when no low carbon alternative exists, provided they arecompatible with the 1.5 degree Celsius trajectory, reflect best-in-class performance and do notlead to lock-in.Article 10(2) of Regulation (EU) 2020/852 states as follows: “[ ] an economic activity for which there is notechnologically and economically feasible low-carbon alternative shall qualify as contributing substantially toclimate change mitigation where it supports the transition to a climate-neutral economy consistent with apathway to limit the temperature increase to 1,5 C above pre-industrial levels, including by phasing outgreenhouse gas emissions, in particular emissions from solid fossil fuels [ ]”.97

This ensures that the criteria defining transitional activities do not compromise the level ofambition of the green taxonomy. Therefore, the transitional activities are on a par with, andequal to, other categories in the green taxonomy. The Commission is required to review thecriteria established for transitional activities every 3-years, to reflect sectoral pathways towardsthe EU’s goals of climate neutrality.While the EU Taxonomy Regulation is an important tool in mobilising investments into longterm sustainable solutions, feedback from the public consultation and the wider reactions byMEPs, Member States, and stakeholders in recent months has highlighted the limitations of theTaxonomy in its current form. In particular, a widespread concern is that the current taxonomyregulation does not allow those activities that contribute to the decarbonisation of the realeconomy be acknowledged.Furthermore, the preparatory phase leading up to the adoption of the delegated act hashighlighted different opinions expressed by MEPs, member states and stakeholders as regardsto the potential inclusion in the taxonomy delegated act of natural gas and related technologies,notably as a transitional activity facilitating the switch from coal and oil to renewables.A similar level public interest and debate surrounding the question of the inclusion of nucleartechnology in taxonomy delegated acts is taking place.In this light and given the legal constraints of the EU Taxonomy Regulation, the Commissionintends to put forward a separate legislative proposal in Q4 2021, specifically covering howcertain economic activities, primarily in the energy sector, contribute to decarbonisation. Thiswill bring clarity to the debate and will also enable the Commission to follow-up on theEuropean Council conclusions of 11-12 December 2020 which acknowledge the role oftransitional technologies such as natural gas. The proposal will have several advantages. Onthe one hand, it will allow a transparent debate by co-legislators on the contribution of naturalgas and nuclear technologies to the decarbonisation objectives, respecting the right of MemberStates to determine their energy mix in an appropriate way. On the other hand, it will clarify toinvestors in a timely manner how such investments should be treated from the perspective ofenvironmental considerations.A separate proposal for establishing specific screening criteria for decarbonisation activitieswill also have the advantage of addressing the concerns expressed by stakeholders on the binarynature of the current EU taxonomy, i.e. that it does not provide guidance on activities that donot meet its criteria. It is important to maintain the solidity and credibility of the taxonomycriteria for long-term sustainable activities.At the same time, the transition to a climate-neutral economy is a process, and under theCommission’s separate proposal it will be possible to acknowledge timeframes andintermediary steps for those economic activities that contribute to this process, a in a mannerconsistent with the timeframes and milestones determined by the Green Deal, thus reinforcingthe contribution of finance to the Green Deal objectives.8

Furthermore, transition is a key issue discussed by the Platform on Sustainable Finance, at therequest of the Commission. In their report to the European Commission published in March202110, the Platform put forward recommendations in the following broad categories: (i)maximise the use of the transitional activity category but maintain the level of ambition of thecurrent EU Taxonomy framework as required by the legal text of the Taxonomy Regulation;(ii) opportunities to develop the future Taxonomy framework; and (iii) utilise other (nonTaxonomy) policies and tools to further support transition finance.Specifically, to maximise the full potential of transition financing opportunities for bothcompanies and investors, the Platform recommended, among other issues, further exploringoptions to:---Recognising – outside the current framework of the green Taxonomy – the efforts madeto significantly improve performance of activities towards (but not reaching) thesubstantial contribution criteria, which may help companies report on their transition;Establishing transition pathways: At the level of activities, establishing pathways foractivities to meet the taxonomy criteria over a defined timeframe could allowcompanies to define intermediary steps on their transition towards Taxonomyalignment. At the company level, also other metrics could be used, such as the EUClimate Transition Benchmark11, TCFD metrics12 or science-based targets;Encouraging the development of specific financial products to finance activities thatare taxonomy-aligned or activities in the process of getting aligned, beyond greenbonds, green loans and other financial products such as sustainability-linked bonds orstructured funds.These recommendations will feed into the work on an updated Sustainable Finance Strategy inJune 2021 and other Commission initiatives to facilitate the development of a coherent andinclusive framework supporting transition finance. The Commission will consider whetheradditional tools are appropriate, in order to effectively support the efforts of the real economytowards sustainable growth.Further details on the recommendations from th

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