Making the EU Taxonomy work in practice: Highlights from the data and usability report

This article was written by Nadia Humphreys, Business Manager, Sustainable Finance Solutions at Bloomberg, Co-rapporteur on the Platform for Sustainable Finance of the European Commission.

To be effective and achieve its goals, sustainable finance regulation must be usable. This means corporates, banks and investment firms must be able to efficiently implement the requirements in their decision-making and reporting processes, resulting in transparent and reliable ESG data for the market.

Yesterday, the “Data and usability” subgroup of the European Commission’s Platform on Sustainable Finance published a report looking back at the first phase of the implementation of the EU Taxonomy, providing recommendations to enhance its usability and improve the coherence of EU ESG regulations. The report is based on contributions not only from Platform members but also on input from the across the market, including from industry associations and market practitioners.

Overall, the implementation of the EU Taxonomy is progressing well according to the report. Of the 1,956 companies covered by the Non-Financial Reporting Directive, 1,053 have reported data for Taxonomy-eligibility and 534 even reported Taxonomy-alignment, which is not required of them yet (this includes firms who have reported 0 alignment). Bloomberg data also shows that demand for sustainable investment products continues to grow, as evidenced notably by the success of article 8 and 9 labelled ETF funds, which took close to 60% of the inflows to European ETF funds year to date.

However, there are clear indications that extra guidance, as the practical implementation of the Taxonomy is hampered by usability issues that are challenging for corporates, banks and investments firms to overcome. The report highlights these and includes specific recommendations for targeted adjustments to enhance the usability of the taxonomy and improve the coherence of the broader sustainable finance framework.

The following issues in particular are highlighted in the report:

• Misalignment between the sustainable finance reporting requirements across different regulations, notably with the same terms having different meanings depending on the regulation (e.g. “do no significant harm”, for which we published an explainer)
• Sequencing issues across the reporting framework, which have complicated the task for investment firms, who need to be able to access reliable information from investee companies in order to be able to provide reliable reports, and demonstrate the sustainable nature of portfolios
• Regulatory overload with a lot of requirements becoming effective in a short period of time, which arguably brings more problems than benefits
• Interpretation issues, which means that what needs to be reported, how and by when is not always clearly understood by all

Last but not least, the report also provides guidance on international application of the Taxonomy, as investment firms that market their products in the EU also need to comply with the regulation.

The Platform notably recommends more efforts to understand commonalities and differences between the EU Taxonomy and other taxonomies, to explore means of increasing interoperability, notably through the development of equivalence tables. As more countries across the globe develop taxonomies, it’s important that some common definitions and frameworks are established, to reduce “lost in translation” risks between the different regimes.