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KAS Publication: EU Taxonomy - Rules fit for Purpose?

Ensuring Taxonomy Efficacy

Executive Summary below:

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The EU Taxonomy, accompanied by its associated reporting directive (CSRD), marks a pivotal moment in sustainability regulation. The EU Taxonomy is estimated to influence around €2.94 trillion, considering only publicly listed parent companies [1]. The core aim of the Taxonomy is to redirect capital towards a more sustainable and equitable economy with a long-term outlook. The main finding of our research is that in order to ensure the efficacy of the EU Taxonomy, a grace period for reporting EU Taxonomy alignment should be introduced. In this grace period companies would report theiralignment to EU Taxonomy regulations without fearing immediate penalty. The focus in early stage reporting should be on proving a substantial contribution to the Technical Screening Criteria. The ‘minimum safeguards’ (MS) and the ‘do no significant harm’ principles (DNSH) can be included over time. The grace period is necessary because our research reveals that non-0% reporting on EU Taxonomy alignment is minimal. Moreover, the projected impact of the aforementioned minimal reporting of non-0% alignment is set to escalate with the rollout of the CSRD, affecting an estimated additional 38,300 companies in the EU by 2026 that have limited to no experience with sustainability reporting.

Additionally, the last delegated act on the environment was published last June and is open for consultation until mid-December. This creates a window of opportunity. This momentum together with the increased dependency on the EU Taxonomy through the (Taxonomy based) EU Green Bonds Standard, covering 2.2 trillion USD, and the aforementioned CSRD, make it apparent that research into ensuring the efficacy of the EU Taxonomy is timely and relevant [9, 11, 26].
This study engaged participants from a prior UNPRI paper and additional industry professionals to offer a well-rounded perspective on the EU Taxonomy’s current usability and quality of reporting. The interviews explored the reception of existing directives and forthcoming regulations (NFRD, SFDR, CSRD) that implement the Taxonomy, aiming to unearth potential challenges and areas for improvement. The focus was on three areas: Data Access and Quality, Third Party Data Providers (Validators), and the European Single Access Point (ESAP), as these three areas have been discussed extensively in UNPRI papers [20, 25] and other discussions regarding the Taxonomy’s efficacy and deployment [6, 11, 16, 21].

The findings suggest a common desire among fund practitioners for an effective Taxonomy. Despite this, investors expressed reservations concerning the Taxonomy’s impact on their business strategies, indicating that substantial refinements are required for broader market engagement. Even sceptically inclined managers displayed a willingness to be proven wrong. The study underscores the importance of fostering engagement across market participants by advancing the Taxonomy to a mature stage. Alterations in the Delegated Acts to provide reassurances and further clarifications at the company level are proposed as a viable means to achieve this.

The responses garnered indicate a perceived lack of usability and/or engagement with the EU Taxonomy in its current guise. The sample of respondents, representing proactive industry participants or the front-runners in green finance, revealed that even dark green funds report a 0% Taxonomy alignment due to the unavailability of data regarding the underlying assets of the reporting entity. The findings are distilled into policy insights addressing the research question: What policy alterations can enhance Taxonomy efficacy?

The culmination of this research is a "Timeline to Taxonomy Maturity" drawn from the findings, which outlines the journey towards reliable and plentiful reporting and legacy data, morphing the Taxonomy into a more potent tool. The maturity horizon is projected within five to ten years, aligned with the phased introduction of reporting directives.
In summary, this paper delineates critical domains for future Taxonomy efficacy research. It sheds light on the current bottlenecks hampering the Taxonomy's evolution to an effective self-regulating system, pinpointing the leverage points where the EU could channel resources for enhanced efficacy.

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Interlocuteur

Dr. Hardy Ostry

Dr

Head of the USA office (in preparation)

hardy.ostry@kas.de

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