How New EU Sustainability Disclosure Rules Will Affect Companies

will help us do it. So if you want to actually know what it is, Mark Taylor and I have sat down with Maya Gottamer, who is an analyst researching sustainable finance for BENF and she's going to talk to us about this EU taxonomy. If you're in finance and you're focused on environmental, social and governance issues or e s G, you likely know what this is, as there has been quite a buzz the past couple of years and it's all really coming together now with a deadline

approaching in twenty two. But if you're not, you might be left wondering what was it designed to do and how might it impact business and finance. Well, Maya recently wrote a research piece titled EU Taxonomy, How to Prepare your reporting for two And if that's a bit advanced and you're thinking what is going on with all of the E s G terminology, you can go back to a primer that Kyle Harrison wrote last year titled Shifting

through the Corporate Sustainability Alphabet soup. These are both available on b NF dot com via our mobile app, or for terminal subscribers at b NF Go. Now, Nope, b NF does not provide investment of strategy advice, and we always have a full disclaimer at the end of the show. And for now, let's join Mark Taylor and Maya Gottomer for today's discussion on the EU Taxonomy. Maya, thanks for joining us. You're welcome. So today we're going to talk

about the EU taxonomy. Now, this is something that governs things that are considered a sustainable activity by a company, and Maya is going to tell us all about it. So Maya, let's start off with what was the taxonomy hoping to achieve and really what problems where they trying to solve when they originally set it up. Basically, the taxonomy is part of a bigger action plan that was set up by the European Commission. It was back in two thousand and eighteen, after assigning of the Paris Agreement

a bit before. Basically they set up an action plan on sustainable finance and what they really wanted to do is that having a strong way to define what we would call a sustainable investment in the European Union and to foster investment towards sustainable activities, sustainable projects and really use finance as a tool to transition. So that was what it was done at the beginning, is still to foster green investment because it's an UNREA mentally sustainable activity.

So there are a lot of existing reporting frameworks for those people who want to support on various E s G metrics. So today we're going to focus in I think on the E part. What were they lacking that there was a need for this taxonomy to come into place. First, they were volunteering. We saw TCFD which brought a lot of people on board which we were not expecting. To jump on the bandwagon of East disclosure and in particularly

climate risk disclosure. You had says by g r I. But the problem is that you had too many now standardization and the goal of the taxonomy is was to build a common classification of what we call green in the European Union. So the goal was to have this classification. It would be a bed rock for future regulations, so regulation they can reach out to when they need to define sustainability and ron mentally sustainable activities in the European Union.

This one was built by a combination of market participants, scientists, people who really know the industries. So the goal was to have a classification of how an activity could be under mentally sustainable in a way that it aligns its activity with the goal of the Parish Agreement. So normally the Youth Taxonomy is basically defining itself as being science based to reach net zero by and to reach alignment with Paris Agreement. Last time we had you on the show,

you mentioned that the taxonomy was coming. You know that it was going to be starting to be put in place in the near future. Why are we talking about it now? What has happened since a few months ago to make this a hot topic right now? What happened is that in the European Union it's a bit more complicated to pass a law. As you may all know, you need to reach agreement between the Council of Europe, the European Commission, European Parliament. So what happened is that

the taxonomy was in the pipeline. Back in the European Commission designated what they called a technical expert group, which was this group of scientists and geo's market participants, corporate it's regulators that would work on the taxonomy standard. And it took them a few iteration and report to finally come with their latest report back in March, and they

put this report to the Commission. The Commission had to review it, and then in July what happened is that the taxonomy regulation finally was published at the official Journal of the European Union and it entered into force in July. When I said the taxonomy enters into force, it means that a very high level text, which means that the Council of Europe, the European Parliament and the European Commission have agreed basically on the highest level of the regulation.

They've agreed on that it needs to be put in place, that it's going to happen that type of thing exactly. But then what happened is that in November we actually had the implementation guidelines from the European Union saying, if you're a cement manufacturer, this is exactly what you need to do if you want to be aligned with the taxonomy. That it is too like what types of companies doesn't apply to you? Semented, cement, who else? It's super broad.

In the latest report that we saw in March before it became official from the European Commission, we had I think about seventies seven, yes, seventy activities covered, ranging from manufacturing, industry, service provider, energy utilities. That sounds like a lot. Is that a lot? Seventy seventy It's kind of a lot. But at the same time you can imagine like clothes retailer were not covered, food retailer were not covered, but aforestation,

food production like really commodities level were covered. And they expanded the number of activities that were covered by the taxonomy in the latest text in November, where even research are academics were covered by the taxonomy. Some activities are not even covered by the taxonomy because the European Commission it judges that in any case it can never claim to be environmentally sustainable in any shape of form, for instance,

oil production, nuclear power generation. You will have some activities that will never be covered by the taxonomy. If you're a company that falls into one of the named industries by the European Commission, then you must comply with this if you want to be considered as a sustainable business or is this for absolutely all of the companies and industries, and that's something you have to do if you just

want to have a business in the European Union. So the taxonomy lists all the industries that are eligible to claim that they can be environmentally sustainable, so we call it like eligibility to the taxonomy. And then after if you really want to prove that you're unvironmentally sustainable, the taxonomy will say, okay, let's say I'm a cement manufacturer. How do I prove that the way I produce cement

is actually unvironmentally sustainable? So the taxonomy has laid out the different we call it technical screening, So it has laid out some tests that you need to perform on your plans to prove that your plans, for instance, produces cement under a certain level of greenhouse gas emission. It protects water and everything. So that's the first thing. So that's the way you can prove that you're unvironmentally sustainable. But not everyone has a mondatory report around its taxonomy alignment.

Why everyone is now under pressing deadline about understanding what is the taxonomy? How do you prove your unvironmentally sustainable? Why is everyone caring about it suddenly right now? While honestly, Dana and Mark, you know how much I've been like

talking about this since I've joined BENF. It's because as of January two, all large listed companies in Europe that are employing more than five hundred employees in Europe will have to disclose how much of their turnover capex and opex is generated or invested in activities that are aligned with the taxonomy. So basically, how much of your revenue is generated from green activities as of January two on

operation of one so basically the current year. And as of January twenty two, asset manager who are claiming that they have an e s G so environmentally social or governance fund or sustainable fund, all those asset managers in the European Union will have to disclose the percentage of their fund that is aligned with the taxonomy. This is

why everyone is freaking out. So this applies to funds that are located in Europe, and I'm looking at the calendar, okay, so we're barely into and for anybody who's listening before, we are located in London. So I'm gonna ask the question the elephant in the room Brexit. What does that mean for all of the investors that are located in London. So it's not only for the fund that are located in the European Union, is for everyone who is marketing or advertising selling an e s G are sustainable fund

in Europe. So it means that even if I'm black Rock and I'm selling an e s G fund in Europe to European clients, I'll fall into the scope of the taxonomy. So Brexit doesn't affect it. One thing that Brexit is doing is that the UK is now currently discussing its own taxonomy. But that's not the only country doing that. She so I'm a little bit confused. So Deadline all listed companies above five employees, But is that only also within the seventy covered activities will clothing retailers

be covered? At that point? Or not. Yes, they will be covered. And basically either they say that they are not covered by the taxonomy or if I am e d F and I have my whole nuclear business line. In the case of e d F, they just can't claim that they can be in any way environmentally sustainable for their nuclear business line. But however, the d F is also generating electricity from hydropower, so that counts. If they can pass the threshold, they will be able to

basically claim taxonomy alignment. Is there anything like this anywhere else in the world. There is nothing like this anywhere else in the world. The more I'm talking with regulators and with central bankers, they are waiting for the European Union to put this taxonomy out because it's a massive game changer. It's going to be something big. It's going to be something that can really revolutionize the way we

consider environmentally sustainable activities sustainable finance. So I heard central bankers and other regulators thinking about creating their own taxonomy. Is For instance, the Hong Kong Steering Group has announced last year that they will work on their own taxonomy. The UK has said so. It's been also mentioned in Canada. The big question will be, for instance, if I'm the Canadian government, it's going to be very difficult to to

completely exclude oil and gas from my taxonomy. So the question will be to try to understand if they will try to integrate those business activities that are so big for for the country but have like very difficult freshold to each or if they're just going to exclude it. The same with the European Union has done it. Guesses included, but under very very strict thresholds. If you don't do buy a guess, you'll probably never meet those freshold. Bikes.

This is a club that you want to be in, though, So if you're doing stuff that's not included in theory, you're not very happy about that because you want to be able to position yourself in this way. Or is this instead something where if you are called out and you're one of them, you're thinking, oh, this is another thing I'm going to have to do. I have to comply in order to keep those in the financial community happy. Like for some of those companies, they just will have

to comply. And we've seen so far three public reporting of taxonomy alignment. One of them was Ana and the second one was Speed which is a least known company. It's basically an engineering company for network energy and they've done their taxonomy reporting. So for actually now working mostly in renewables, it was not so much of a challenge. But for Speed, for instance, it was much more of a challenge because they are also servicing oil and gas

and and all sorts of different companies. You want to be I mean as a as a country, you don't want to be a lagger, so you you will have to implement something similar to the taxonomy in your own country. Because the taxonomy is addressing the threat of greenwashing. It's addressing the threat of everyone claiming that they are sustainable.

The taxonomy is nothing less than you know, when we started to talk about organic product and you used to go to Tesco or sainsbury and seeing everyone calling their product organic. We saw a whole range of lexical field

being used. I struggle with that, by the way, as somebody who's looking for green products, I find it very frustrating what I've feel like I've been misled, exactly as someone who is investing in her pension, I'm sure you also find misleading that someone is pretending that a specific fund or exchange traded fund is sustainable, right, and then you open the fund and you see that maybe the fund is like partially invested in oil and gas. I find this frustrating as someone who has to choose to

choose her a punch and fund. So what the taxonomy is enabling you to do is to understand, Okay, if I take this very strict framework, how much of my pension fund is actually invested in green activities? And if you're a company, most of them are also willing to appeal to those sustainable investor who are not on the niche investors anymore. The whole economy is in transition right now.

Do you think they're going to add additional industry though, because you previously mentioned oil and gas, and you know, it's kind of easy to throw the baby out with the bathwater with that one. But there are several oil majors who out there making great strides to pivot their business.

And what if my values based judgment is an investor says, you know what, I want to keep them in because they're transitioning, and another person says, no, I don't really want them in if they're not in there in the taxonomy, are we going to have the transparency that we need in order to make those values based judgments. One of the big criticism that the taxonomy has received it's that it's really black and white. It's really manichean. It's either

you're in or you're out. You can't be transitioning. So I think that the same way Marcus was asking at the beginning, like if I'm a cloth retailer or I'm a cloth manufacturer, how can I claim that I'm environmentally sustainable those kind of cases, you could imagine a cloth manufacturer under certain threshold being able to produce garments in

a sustainable manner, So those could be added. The technical expert group that was sta bleashed back in two thousand and eighteen to work on the taxonomy basically has been replaced by something called the Platform and Sustainable Finance, and

that's gonna go on for another two years. You can reach out to them if you think that you can claim that you're environmentally sustainable and that you're not covered by the taxonomy, and then they can think about technical screening criteria like tests to actually prove that for your own activity. So that's the first thing. The second thing about the criticism around like for instance, oil and gas. Indeed, we've covered it as BENF actually that a lot of

oil and gas companies are currently transitioning. But the reason why I think the taxonomy is still could appeal to them is that if you take the oil and gas companies like Shell or BP, which have made climate neutrality pledges, they've also started investing in renewable and they've started gen racing revenue from renewable. Now, for a very short break, stay with us. Can we go back to who's really

pushing for this? As you're talking about it, I keep wondering, is it like the EU that it's trying to put a regulation in place to to make things more clear. Is it investors that want to have sustainable companies they can credibly call sustainable that they can invest in, or is it companies that want appear attractive to potential investors.

I think this agenda was first pushed in retail investors and investors like us who are investing in pensions, who really wanted to know what is sustainable or not so pension funds. Who's going to be around in forty years? Right? Yeah, exactly and fifties About as far as any of us can look at right now. Well, unless you're China then

it's twenty sixty, so forty years there. So it's been asked by investors because you want to have more transparency around sustainable statements, but it's been mostly pushed by regulators, like there is currently a consortium between the European Central Bank with Kristin Nagad and the European Commission with Lan. They're really pushing the climate agenda. I'm not sure it would have gone as quick if they were not both leading the European Commission and the European Central Banks. Let's

be honest, okay, And who does it benefit most? So does it benefit the regulators from having the system in place, or investors or who it benefits? First retail investor. It benefits investors like us, not institutional investors, because we understand where we're putting our money. We understand there is real transparency, real accountability. We can't just claim to be sustainable. We can't just do climate pledges and not have something that

follows really those statements. So it benefits us, but it benefits everyone overall. Because it was really interesting talking with the technical expert group and the platform, because I worked with them on this report. They were like, achieving carbon neutrality by is not going to be an easy task, and we need to find a way, a pathway to do that. And this is why we need to be really clear as the European Union, where we want money to go to achieve that goal. And this is who

it's benefiting. So it's basically benefiting us in the future generations as well because finance should be used as a tool to achieve those goals. This is who it's benefiting, and it's bringing clarity to the market. So even if at the moment everyone is complaining about the fact that the taxonomy reporting will be a tough one to implement, this is why people are really complaining about it. It's benefiting all of us. Is there a dark side though,

So let's let's get into that a little bit. So I would love, I would love to believe that it's benefiting all of us. So you say it's not easy, it's going to be tough to implement, the goals are super ambitious. What is the biggest frustration and all of this, and I guess I would couple that with like, is there a loophole? You know, is there a game stop?

Style loophole that that could blow this all up. Well, I'm kind of biased because I think it's a great standard, so I need to say it out like before I answer out of like intellectual injury. The biggest frustration I hear about the taxonomy is first, it's gonna be really tough to implement because the asset managers who are claiming that they have sustainable funds, they'll have to report that data even if they are holding global funds with like

thousands of names. And the small asset managers, which sometimes are really thematic investment manager, so you know, those impact funds that we've known forever, they will not necessarily have the financial ability to gather this data and to implement the taxonomy is going to be tough for them. The reason why the European Union decided also to force asset manager to disclose that data is because so that they

can push company to disclose that data. I think that by putting asset manager under the mandatory disclosure, they'll push companies to do it, and I think they're right, but this is one of the main frustration. Second frustration is around the Manichean vision of the taxonomy. You're either green or you're not. And also to prove your grain, you have several step to photo. We're not going to go into the details of that today in this webinar, but you have several step and several tests to to do

on your economic activity to prove that it's green. So it's going to be really difficult to perform. What the European Commission is answering to that is that, well, the data is gonna buy the iteration in and year after year the data is going to be better and we need to do it. So you just gotta get started

regardless exactly. So there's all these other reporting frameworks you mentioned that at the top of the show, the TCFD sasby if and when the EU Taxonomy comes into play and it's successful, what happens to those Do they keep going or do they ride often in the sunset or what? Yes,

we will still need some of those reporting frameworks. The taxonomy is answering some of the question, but as we saw, is very binary and the same way that you may want to report on your environmental social performance as a whole. There's going to be other regulation in the European Union because actually the taxonomy is part of a bigger group of regulations, and under the taxonomy you may rely on other reporting standards to get your data or to perform

your taxonomy assessment. For instance, under the taxonomy, to prove your central contribution to climate change adaptation, you need to perform a physical climate risk materiality assessment, So you need to see how much you would be impacted by physical climate risk, and we knew that TCFD is a very robust framework to assess that. Therefore, even the Technical Expert Group the platform or promoting TCFD or at least listing it within the different framework of reporting that could be

useful for your own taxonomy assessment for instance. So we're not to the finish line yet, it's not January, and between now and then and maybe beyond my what is it that you want to know? And how do you think this is all going to turn out? Is it going to end in tears or is it going to be something that's going to bring us to some sort

of sustainable nirvana. I'm being optimistic. I think that the Taxonomy is really trying to finally cut through all the greenwashing threat we've been seeing over the past few years. Sustainable investment is gaining an incredible momentum. This year has shown record high inflows into environmentally social funds. We've see a lot of interest. When I started my career at Bloomberg, I was told that sustainable finance was something for millennials and women. And I think it's yeah, it was. It's

growing in interest, it's reaching everyone. The sustainable finance market is no more a niche market. It's it's really being

integrated in in in finance as a whole. And I think that what the taxonomy will also achieve is that it's going to raise awareness and it's going to bring that momentum from just being a trend to become something that is part of our social contract as the European Union A countries saying that when I'm investing, I should not only care about the financial aspect of my investment, but I also should also care about the environmental and

social aspect of my investment. Because the technical what used to be the technical expert groups of the platform Unstainable Finance, is now working on a social taxonomy as well. The thing that could be difficult is that how do we achieve a fair transition. So if the taxonomy is shedding some lights on some green sectors, what do we do about all the other sectors that employ thousands of people?

And I think that it can end up in tears if we do not take into account that we're currently transitioning and that we need to support that as well, which is where I think that SDGs fit in sustainable development goals and bringing everyone along with us well. On that note, Maya will have to have you back in a year to see where we got on with all of this. When everything gets implemented, I'm sure it's going to be a busy year for a number of reasons,

but definitely a space to watch. Thank you for joining us today. Thank you. Today's episode of Switched On was edited by Rex Warner of Grace Stoke Media. Bloomberg an e F is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor it should it be construed as investment advice, investment recommendations, or recommendation as to an investment or other strategy. Bloomberg an e F should not be considered as information sufficient upon

which to base an investment decision. Neither Bloomberg Finance LP nor any of its affiliates, makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording. Did expressly disclaimed