Taxonomy Regulation

    Taxonomy Regulation

    One of the initiatives arising from the European Commission's Action Plan on Sustainable Finance is the Taxonomy Regulation that creates a unified classification system for sustainable activities. 

    The Taxonomy Regulation:

    • Creates a harmonised classification system for economic activities that qualify as environmentally sustainable for investment purposes
    • Applies to all financial products regardless of whether they are marketed as “green” or not

    In order to be considered an “environmentally sustainable investment” a fund must:

    1. Invest in economic activities that contribute substantially to one or more of 6 environmental objectives
    2. Do no significant harm to any of the 6 environmental objectives
    3. Comply with minimum human rights / social safeguards
    4. Comply with minimum technical screening criteria (to be established)

    The applicable disclosure requirements relating to compliance with the Taxonomy are based on whether the fund is “green” or has ESG characteristics. Where a fund does not take into account the EU criteria for environmentally sustainable economic activities (and therefore does not apply the Taxonomy) this must be stated in the prospectus and periodic reports. 

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