Support for PSF Plan to Streamline EU Taxonomy
Proposals to simplify reporting requirements have been broadly welcomed by industry, but uncertainty lingers under shadow of omnibus.
A proposal from the Platform on Sustainable Finance (PSF) to simplify the bloc’s environment taxonomy is a welcome example of how to streamline an existing regulation without overhauling it, say experts.
In its report, published last week, the PSF proposed changes to ease the compliance burden of the EU’s taxonomy reporting rules and enhance their coherency with other pieces of sustainability regulation.
The taxonomy, which came into effect in 2022, outlines economic activities that can be considered as sustainable across EU member states.
“There is definitely scope for simplifying the taxonomy and reducing the data requirements, thereby improving comparability, and hopefully allowing for these datasets to be used as a more effective basis for investment decisions,” Simone Ruiz-Vergote, Global Head of ESG and Climate Regulatory Solutions at MSCI, told ESG Investor.
“It is encouraging that simplification could be achieved within the current regulatory framework.”
Easing the burden
The PSF’s recommended changes a clearer definition of the use of estimates within the taxonomy framework and safe harbours for financial sector reporting, which exempt companies from certain liabilities in cases where estimates are used.
A prominent issue raised in the report is the heavy reporting and compliance burden for companies.
In particular, the PSF recommends that companies should be allowed to take a comply or explain approach to the taxonomy’s do no significant harm (DNSH) requirements. The PSF acknowledged that the process of assessing whether an activity meets DNSH criteria can be highly complex and difficult to verify retrospectively. In fact, just 3% of the DNSH criteria are quantitative and linked to a standard, according to the report.
The PSF has proposed refining the DNSH assessment by tailoring it to different users and geographies, which it argued would make it easier for reporting entities to demonstrate compliance.
For small- and medium-sized enterprises (SMEs), the PSF has also developed simpler voluntary approaches to ease the compliance burden.
Another issue raised in the report is the need for financial institutions to get to grips with the green asset ratio (GAR) and green investment ratio (GIR), both of which aim to quantify the proportion of sustainable investments in investment portfolios. The PSF proposed allowing entities to use proxies and estimates where necessary.
“The Platform’s recommendations – especially simplifying the KPIs for financial institutions, enhancing the usability of DNSH criteria and the use of estimates – should help investors make practical use of the EU Taxonomy as a tool to channel capital towards sustainable activities, and therefore to realise the associated responsible investment benefits in their work,” said Ben Leblique, Senior EU Policy Specialist at the UN-convened Principles for Responsible Investment (PRI).
The Autorité des marchés financiers (AMF), France’s securities commission, recently assessed the first alignment reporting of financial institutions against the taxonomy. It found that disclosures remain “dense and difficult to understand”.
2024 research from the European Insurance and Occupational Pensions Authority found that just 4.5% of occupational pension funds’ direct equity and corporate bond investments were aligned with the EU Taxonomy, with a further 26.1% of these funds’ direct equity investments eligible for alignment.
Uncertain future
Despite support for the PSF’s suggested changes, there is a great deal of uncertainty about the extent to which the European Commission will carry its recommendations forward. This is due to ongoing efforts to push through an omnibus package that will introduce sweeping changes across the sustainable finance framework.
It is expected that the Taxonomy Regulation will form part of the omnibus framework, which is due to be unveiled later this month.
The omnibus proposal seeks to reduce the EU’s corporate reporting requirements by 25%, but there are mounting concerns that the omnibus will go further and water down key sustainability-focused regulations like the Corporate Sustainable Reporting Directive, Corporate Sustainability Due Diligence Directive and the taxonomy.
“We acknowledge efforts to ensure more consistency and usability across the framework could help further increase its use by corporates and financial market participants – but these changes must preserve its ambition and core principles,” said Pierre Garrault, Senior Policy Advisor at Eurosif.
“[The PSF] report shows that taking the time for a thorough assessment of EU rules can lead to identifying significant adjustments at the technical level that preserve their core principles.”
It is possible that the commission may incorporate some of the PSF’s proposed recommendations in the omnibus package, according to Arthur Carabia, Director of ESG Policy Research at Morningstar Sustainalytics.
“It will then be up to European Parliament and the Council to review it, potentially amend it and then agree on a common final rule,” he said.
“The ambitious goal is to adopt these changes before the next wave of reports due in 2026.”
In January, the PSF also published a draft report containing preliminary recommendations for revisions to technical screening criteria for activities included in the taxonomy’s Climate Delegated Act (CDA). It included recommendations to update and simplify the CDA’s DNSH criteria.
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