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EU taxonomy shifts from theory to practice

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The European Union’s classification system has been tested and the results look promising, according to the Principles for Responsible Investment (PRI).

An adviser to the EU and member of the Technical Expert Group (Teg) on Sustainable Finance, the PRI coordinated a working group on the development of the taxonomy and recently revealed the first comprehensive set of case studies by investors who have tested it.

Reviewing the results, the PRI wrote in its Testing the Taxonomy report: “Many challenges remain, not least the availability of data and potential changes to the detailed taxonomy criteria.

“Nonetheless, the progress made by the group is encouraging. The case studies detailed here demonstrate that the taxonomy framework can be operationalised, and offer important insights for investors beginning their taxonomy preparation.”

By the end of 2021, investors that offer funds in Europe which are described as “environmentally sustainable” will be required to explain how, and to what extent, they have used the taxonomy in determining the sustainability of the underlying investments, the PRI report said.

They must also disclose the proportion of underlying investments that are taxonomy aligned as a percentage of the investment, fund or portfolio, it said.

More than 40 investor signatories, EU-based and non-EU firms, participated in the testing and made recommendations on how to implement the taxonomy and how policymakers and supervisors can improve it.

Lacking data 

The taxonomy serves as a roadmap for investors with regard to the EU’s environmental goals, including the bloc’s aim to achieve carbon neutrality by 2050.

As it stipulates thresholds, such as for carbon emissions, it defines sustainable activities to avoid greenwashing and increase sustainable finance flows.

One of the participants of the testing, Axa Investment Managers, implemented the taxonomy for a global fund which held equities and corporate bonds.

Axa commented: “Environmental, social and governance (ESG) and green data is still lacking in some instances, and it will take time for providers to reach the required levels. Meanwhile, there is scope for engagement with companies and issuers to achieve better disclosure and transparency.

“Investors should back collaborative initiatives, such as the Climate Action 100+ initiative or the Net-Zero Asset Owner Alliance, to push companies and climate solutions providers to share more diverse information sets.

“Current green identification solutions are mostly focused on revenues. More work is required to enhance green identification using opex and capex, and company disclosure of this information needs to improve.”

Another participant commented: “Compliance, at least at this stage, will be on best-efforts basis. This will hopefully change as better data becomes available.”

Meanwhile, participants also saw opportunities to help shaping standards.

One group member said: “Industry groups and trade associations have a role to play in translating the taxonomy into an industry reporting standard, supported by best practice processes and assurance requirements.”

Revision of the reporting directive

To help solving the lack of data, the EU is currently revising the Non-Financial Reporting Directive (NFRD).

Will Martindale, director of policy and research at the PRI, told Expert Investor: “Good quality, relevant and comparable data remains one of the biggest challenges faced by investors seeking to integrate sustainability risks into their investment practices and outcomes.

“The NFRD revision is a very positive step on disclosure but it doesn’t go far enough, which is why the PRI has called on the Commission to support an end-to-end sustainability reporting framework with a set of standardised, mandatory disclosure indicators covering all ESG topics.”

Speaking at a webinar conference by City & Financial Global, Martin Spolc, head of unit, sustainable finance at the European Commission, explained that more work needs to be done on the taxonomy, in particular on data and indicators.

“I think that the focus has to be now on making sure that [the taxonomy] works on the ground”, Spolc said.

He also pointed to a mismatch in the current timeline of when different regulations become effective for corporates and the financial sector.

“It will be quite tough for the financial sector, in the next, let’s say, two three years, not only for them, but also for the corporates, but we will have to find a solution in the meantime,” he said.

Meanwhile, Spolc added that the EU is also working on solutions to identify suitable indicators.

Low taxonomy alignment

US investment management firm Neuberger Berman was one of the participants who published the degree of taxonomy alignment of its total portfolio.

Using company turnover, Neuberger Berman determined that 20% of its portfolio was aligned with the EU’s framework.

A further 1% was potentially aligned as company disclosure was incomplete; while another 3% was potentially eligible if not-yet-detailed EU environmental objectives (beyond climate mitigation and adaptation) are included in the assessment.

Martindale also explained that low taxonomy alignment of a green portfolio does not necessarily mean that a case of greenwashing, according to EU standards, exists.

He pointed out that currently the role of ‘neutral’ activities, ie activities that neither significantly harm nor contribute to ESG objectives, are not covered by the taxonomy.

If these were included, as the PRI suggests to policymakers, it “may help to contextualise the relatively low proportion of taxonomy alignment that we saw in some case studies”, he said.

Other EU testings

Other previous testings could indicate that EU aligned green investments may be low as of today.

Draft EU Ecolabel criteria testing

In June 2020, the Commission, the Climate Company and the Frankfurt School of Finance and Management tested draft EU ecolabel criteria on Ucits equity funds.

The report analysed the share of EU taxonomy-aligned revenues to a sample of 101 ‘green’ Ucits equity funds domiciled in the EU27.

According to the report, only three ‘green’ Ucits equity funds qualify under draft ecolabel criterion I, ie green investments.

It concluded that EU disclosure obligations will help address data gaps, while the expansion of the EU taxonomy to other environmental objectives will enlarge the universe of potentially eligible economic activities.

Eiopa insurance testing

In July, the European Insurance and Occupational Pensions Authority (Eiopa) published another testing on the alignment of insurance portfolios with the taxonomy in its Financial Stability Report.

It mapped Solvency II investment data reported by the European solo insurers and reinsurers for Q3 2019 against the economic activities covered by the taxonomy through the relevant Nace codes, which is a statistical classification of economic activities.

It found that, currently, only a small portion of the insurer’s investments are made in compliant activities, as insurers exposure is focused on financial activities.

Overall, about 5% of the total asset value (including property assets) held by insurers may be eligible to the taxonomy, while for equities and corporate bonds, roughly 13% and 6% respectively may comply.

In 2019, European insurers had an estimated €11.4trn of assets under management, the report said.

PRI recommendations

The investors participating in the PRI testing made a series of recommendations to policymakers and supervisors, which, supplemented by PRI’s own analysis, are:


The taxonomy regulation will require corporate disclosure against the taxonomy. While this is recognised by participants as very significant, policymakers should go further to ensure that the right data, at the right level of granularity, and for the right issuers, is available.

Guidance and supervisory expectations

Investors anticipate a need for significant practical and interpretive guidance for all taxonomy users (investors, corporates and service providers), as well as clear expectations from supervisors.

Taxonomy development

Investors desire greater clarity on the selection, and exclusion, of some indicators and activities. Consistent with other studies, investors recognise the need to avoid competing international taxonomy frameworks.

Martindale commented: “Regulators in Europe, South Africa, China and Malaysia are increasingly turning their attention to taxonomies.

“The PRI considers taxonomies a generational shift in how we think about sustainability issues. Taxonomies are here to stay.”

Elena Johansson

Senior Reporter

Part of the Mark Allen Group.