On 9 March 2020, the European Commission Technical Expert Group on Sustainable Finance (TEG)  published its final report on the taxonomy.

The final report and its Annex present the TEG’s final recommendations to the European Commission (Commission) relating to the overarching design of the taxonomy, the technical screening criteria for climate change mitigation objectives, climate change adaptation objectives and ‘do no significant harm’ (DNSH) criteria for other environmental objectives under the Sustainable Finance Taxonomy Proposal (2018/0178(COD)).

The final report also contains recommendations for the tasks and functioning of the Platform on Sustainable Finance, which is an expert group that will be established under the Taxonomy Regulation to advise the Commission on Level 2 measures. The TEG recommendations will be used by the Commission in its preparations for the Level 2 measures that will be adopted by 31 December 2020, in which it will list economic activities that substantially contribute to climate change mitigation and climate change adaptation.

In addition, the TEG final report contains guidance on how companies and, in particular, financial market participants should use the taxonomy in their disclosure obligations under the Taxonomy Regulation and the Regulation on Sustainability-Related Disclosures in the Financial Services Sector (Regulation (EU) 2019/2088) (SDR). The final report supersedes the two previous reports published in December 2018 and June 2019. The TEG has taken into account the feedback it received by stakeholders after the publication of the June 2019 report and the amendments to the Commission proposal as agreed by the European Parliament and Council in their political agreement in December 2019. Overall, no substantive changes have been made to the approach taken by the TEG.

Points of interest are:

• The TEG writes in section 2.3.3 of the final report that it has developed technical screening criteria for 67 economic activities, which it presented in its June 2019 report, for the purposes of two environmental objectives: climate change mitigation and climate change adaptation. The final report contains a small number of new examples of economic activities that can make a substantial contribution to climate change adaptation: the provision of non-life insurance; research and development (natural science and engineering); and engineering activities and related technical consultancy dedicated to adaptation to climate change.
• The TEG advises the forthcoming Platform on Sustainable Finance to conduct a full evaluation of economic activities that can substantially contribute to one or more of the environmental objectives that have not been considered by the TEG. These are the environmental objectives of pollution prevention and control, sustainable use and protection of water and marine resources, circular economy, and the protection and restoration of biodiversity and ecosystems.
• As regards the list of economic activities that can substantially contribute to climate change adaptation, the TEG final report now includes the DNSH criteria for the other five environmental objectives. In the June 2019 report, only DNSH criteria for activities that contribute substantially to climate change mitigation had been included.
• Section 3 of the final report provides the TEG’s proposed guidance on how non-financial companies subject to the Non-Financial Reporting Directive (2014/95/EU) and financial market participants should make use of the taxonomy in their obligatory sustainability disclosures under EU law. The guidance was included following stakeholder comments on the June 2019 report. The guidance includes the disclosure requirements for financial market participants set out in the SDR and links these obligations to the Taxonomy Regulation. The guidance takes a step-by-step approach and provides examples to calculate the share of sustainable investments at company and portfolio level.
• The Annex to the final report includes the methodology used by the TEG for developing the technical screening criteria for climate change mitigation and adaptation objectives and DNSH to the other environmental objectives. Additionally, it presents the full list of technical screening criteria for the economic activities considered.

In terms of next steps, the Level 1 text of the Sustainable Finance Taxonomy Regulation is expected to be published in the Official Journal of the EU in Q3 2020. As stated above, the Commission delegated act laying down technical screening criteria for the climate change mitigation and climate change adaptation objectives will be adopted by the 31 December 2020 deadline. The delegated act laying down technical screening criteria for the remaining environmental objectives under the Taxonomy Regulation must be developed by the Commission by 31 December 2021. Financial market participants will be required to complete their first set of disclosures against the taxonomy, covering activities that substantially contribute to climate change mitigation and climate change adaptation by 31 December 2021. For the other four environmental objectives, these disclosures will be required by 31 December 2022.

Alongside the final TEG report on the sustainable finance taxonomy, the TEG has published an EU Green Bond Standard Usability Guide. The guide contains the TEG’s recommendations on the practical application of the EU Green Bond Standard which the Commission is considering establishing. The EU Green Bond Standard would be a voluntary label for bonds for issuers that wish to align with best practices in the market. The criteria would be based on the Taxonomy Regulation. The Commission intends to launch a three-month public consultation on the Green Bond Standard in mid-March. A legislative proposal is likely to be published in Q3 2020 alongside the Commission’s updated Sustainable Finance Strategy.

With regard to the TEG, the Commission has prolonged its mandate until September 2020. For the time being, the TEG will have an advisory role on the sustainable finance taxonomy framework until the Platform on Sustainable Finance established by the Sustainable Finance Taxonomy Regulation will become operational.