One of Europe’s most influential lobby groups called for further reductions to the EU’s taxonomy last week.
In a statement about the ‘Omnibus’ package currently being negotiated by Europe’s lawmakers, BusinessEurope argued that investors don’t need as much data as the Taxonomy Regulation mandates its members to provide.
The body recommended a number of further cuts to the requirements, which are already set for a huge scale-back under the proposals.
The current plan to reduce the scope of the Corporate Sustainability Reporting Directive (CSRD) will, by default, slash the number of firms disclosing their alignment with the taxonomy, because inclusion in CSRD is the trigger for such disclosures.
In addition, the Commission plans to carve out all companies with less than €450m in net turnover, even if they’re covered by CSRD.
The proposals are expected to shrink the number of firms publishing mandatory taxonomy-based information by at least 80%.
Those left in scope will also have their reporting obligations reduced through changes to the content of the taxonomy itself.
While those set to be removed from requirements have breathed a sigh of relief at the EU’s plans, they could make things trickier for fund managers covered by the EU’s Sustainable Finance Disclosures Regulation (SFDR).
“The interesting thing with Omnibus is how it will impact SFDR,” says Karl-Oskar Olming, head of sustainability strategy and policy at Swedish asset manager SEB.
Olming was a member of the Platform on Sustainable Finance (PSF) that recently advised the Commission on how to reimagine the SFDR.
The Platform focused on turning it from a disclosures regime to a categorisation system with taxonomy disclosures at its heart.
“The interesting thing with Omnibus is how it will impact SFDR”
Karl-Oskar Olming, head of sustainability strategy and policy at SEB
It recommended the creation of ‘sustainable’ and ‘transition’ fund labels, for example, for which managers should explain how closely aligned the activities or spending of portfolio companies are with the framework.
Similarly, the European Securities and Markets Authority (ESMA) leans heavily on the taxonomy in its recommendations for how to turn SFDR into fund labels.
“Regulators, especially ESMA, don’t seem to be comfortable letting asset managers decide what they think is a sustainable investment,” observes Heike Schmitz, co-head of ESG at law firm Herbert Smith Freehills.
“That’s why the taxonomy still holds a lot of charm for regulators – it’s an external framework that sets the definitions for everyone. It means all they have to trust the investors to do is to dig for the relevant information.”
That digging may get a lot harder, though, if only Europe’s very biggest companies are mandated to report against the taxonomy.
“It will certainly increase the burden on investors making claims,” says Schmitz. “They will need to get the information directly from the company.”
“Regulators, especially ESMA, don’t seem to be comfortable letting asset managers decide what they think is a sustainable investment”
Heike Schmitz, co-head of ESG at law firm Herbert Smith Freehills
The Commission is currently gathering market feedback on the redesign of SFDR, having launched a month-long call for evidence last week.
Olming says the relationship between the Taxonomy and SFDR is “key” when it comes to the revisions.
“Many stakeholders, including ESMA and the PSF, have spent the last six months providing feedback and advice to the Commission about how to revise the [SFDR] regulation at Level One, and now a lot of the foundations for that input have been removed,” he says.
What can be expected?
A spokesperson for ESMA told IPE it was closely following the legislative negotiations around the taxonomy “and will in due course assess the impact on its [SFDR] recommendations”.
“However, at present, any assessment appears premature as it would be based on conjecture regarding the outcome of the negotiations,” he added.
A spokesperson for the European Commission said “some implementation challenges cannot be anticipated” and it planned to work with stakeholders on its entire simplification agenda, to make sure it still achieved its original regulatory objectives.
The final revisions are expected at the end of the year, after a delay to give Omnibus negotiations a chance to play out.
“It is a tight timeframe to put forward a revised SFDR regulation in the fourth quarter, since the Omnibus changes are significant,” says Olming.
“The Taxonomy won’t be able to be the main determinant of what’s sustainable if not enough companies are reporting against it in the investable universe. So they will have to rethink SFDR more fundamentally.”
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