Simplifying EU Taxonomy
The EU Platform on Sustainable Finance releases a report on the EU Taxonomy, aiming to provide recommendations for simplifying EU Taxonomy and promoting sustainable finance development.
The Platform believes that the EU Taxonomy, as the first framework in Europe to measure the sustainability of investment and corporate activities, has contributed to the development of a green economy. The modification and simplification of the EU Taxonomy can make it perform better.
Related Post: The EU Releases a Report on the Application of EU Taxonomy
Background of Simplifying EU Taxonomy
The Platform has conducted a survey in the past two years on investors, banking institutions, businesses, auditing institutions, and other entities involved in the EU Taxonomy, aiming to understand how to simplify the Taxonomy. In October 2022, the Platform released recommendations on data and usability, and in January 2024, the Platform released a Compendium of Market Practices to provide recommendations. At present, non-financial enterprises have reported relevant information in 2023 and 2024 (fiscal years 2022 and 2023), while financial enterprises have reported relevant information in 2024 (fiscal year 2023).
In the process of simplifying the EU Taxonomy, the Platform has considered the following key principles:
- Principle of Consistency: Ensure that the simplification process does not modify definitions and calculation methods and does not affect the consistency of the Taxonomy with other regulatory policies.
- Principle of Relevance: Ensure that the report reflects the green transition of market participants, reducing their funding costs and compliance burdens.
- Principle of Proportionality: Ensure fair distribution of reporting burden and avoid unnecessary information disclosure obligations for small and medium-sized enterprises.
- Principle of Applicability: Ensure that all recommendations are feasible and can be integrated into existing regulatory frameworks.
- Principle of Prevention: Ensure that all modifications are based on the principle of protecting the integrity of the framework.
Proposal for Simplifying EU Taxonomy
The EU Platform on Sustainable Finance proposes simplified EU Taxonomy based on the above principles, which are expected to reduce the information disclosure burden of market participants by one-third. The proposal includes:
- DNSH criteria: For non-financial enterprises, the platform recommends reviewing all standards, prioritizing their usability in terms of turnover, and allowing participants to evaluate turnover consistency based on the principle of Comply or Explain. For financial enterprises, the Platform suggests reducing the requirement for financial enterprises to verify compliance with standards, allowing them to estimate their risk exposure to institutions that do not fall within the scope of the Corporate Sustainability Reporting Directive (CSRD).
- Corporate KPIs: The platform recommends that the EU only calculate operational expenditure indicators for research and development activities, reduce the disclosure burden on non-financial enterprises, and support enterprises in seeking green financing in research and development financing. The EU should also establish material thresholds for non-financial companies to disclose key performance indicators, to avoid selective disclosure by companies. Thresholds can be based on percentages or absolutes, and companies need to provide clear evidence when not disclosing relevant indicators.
- Green asset ratio: The green asset ratio can improve the green transparency of banking institutions’ balance sheets. The platform suggests that the EU optimize its calculation method and exclude asset classes that are not applicable. For the risk exposure of non-EU enterprises, banking institutions can use estimated values to create a fair environment for green financing and transition financing.
- Underwriting KPIs: Underwriting key performance indicators are related to insurance company information disclosure. The Platform suggests that the EU establish a material threshold for the underwriting ratio of the Taxonomy and explore the contribution of insurance companies to non-climate environmental goals.
- Report Template: The Platform has reviewed the report templates applicable to non-financial enterprises, banking institutions, and insurance companies, and recommends that the EU simplify disclosure by reducing fields or merging templates to avoid redundancy and delete information that has no impact on decision-making. The EU can also consider implementing machine-readable automated methods to improve the efficiency of using Taxonomy.
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