Article 3(3) of TEU states that ‘The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance’.
Over time, sustainability has been typically associated with the so-called ESG factors, which, in turn, refer to three different, yet inter-connected, dimensions, namely the environmental dimension, the social dimension and the governance dimension.
See United Nations, Transforming our World: the 2030 Agenda for Sustainable Development, A/RES/70/1, available at https://sustainabledevelopment.un.org/content/documents/21252030%20Agenda%20for%20Sustainable%20Development%20web.pdf.
European Commission, Communications on Sustainable Development: EU sets out its priorities, 22 November 2016.
United Nations, Paris Agreement, 2015, available at https://unfccc.int/process-and-meetings/theparis-agreement/the-paris-agreement.
European Commission, Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions, Action Plan: Financing Sustainable Growth, Brussels, 8.3.2018 COM(2018) 97 final.
Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088.
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector.
For a legal analysis of the Taxonomy Regulation see Gortsos, The Taxonomy Regulation: More Important Than Just as an Element of the Capital Markets Union, European Banking Institute Working Paper Series 2020 n. 80, passim.
More precisely, pursuant to article 1, the Taxonomy Regulation ‘establishes the criteria for determining whether an economic activity qualifies as environmentally sustainable for the purposes of establishing the degree to which an investment is environmentally sustainable’.
Recital 12 of the Taxonomy Regulation.
In literature, the term sustainable investment is often used as an umbrella term to refer to sustainable, responsible and impact investments; see Liang and Renneboog, Corporate Social Responsibility and Sustainable Finance: A Review of the Literature, European Corporate Governance Institute, Finance Working Paper n. 701/2020, passim.
Article 3 of the Taxonomy Regulation: ‘Criteria for environmentally sustainable economic activities’.
In turn, according to article 2 paragraph 1(1) of the Taxonomy Regulation, ‘environmentally sustainable investment means an investment in one or several economic activities that qualify as environmentally sustainable under this Regulation’.
For the definition of financial product, the Taxonomy Regulation refers to article 2 paragraph 1(12) of the SFDR, under which ‘financial product means: (a) a portfolio managed in accordance with point (6) of this Article; (b) an alternative investment fund (AIF); (c) an IBIP; (d) a pension product; (e) a pension scheme; (f) a UCITS; or (g) a PEPP’.
On the functioning of the European passport for the cross-border provision of financial services in the Union see Bodellini, Does it still make sense, from the E.U. perspective, to distinguish between UCITS and non-UCITS schemes?, Capital Markets Law Journal, 2016, 4, p. 528 – 539.
On the risk of regulatory arbitrage in the EU financial services market see Bodellini, The E.U. regulation on marketing of alternative investment funds: another step towards integration of the E.U. financial market, Business Law Review, 2016, 6, p. 208 – 219; Bodellini, The marketing of hedge funds in the U.K.: did the system maintain its attractiveness after the transposition of the AIFMD?, Business Law Review, 2016, 5, p. 162 – 172; Bodellini and Olivares-Caminal, The impact of Brexit on the UK alternative investment fund industry, Law and Economics Yearly Review, 2017, 1, p. 79 – 103.
According to Recital 11 of the Taxonomy Regulation, ‘…In the context of this Regulation, greenwashing refers to the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met’.
According to article 2 paragraph 1(5) of the Taxonomy Regulation, ‘climate change mitigation’ means the process of holding the increase in the global average temperature to well below 2 °C and pursuing efforts to limit it to 1,5 °C above pre-industrial levels, as laid down in the Paris Agreement’.
According to article 2 paragraph 1(6) of the Taxonomy Regulation, ‘climate change adaptation means the process of adjustment to actual and expected climate change and its impacts’.
The objective of the sustainable use and protection of water and marine resources should be interpreted in accordance with the sectoral legislative acts laid down in recital (26) and the Commission Communications of 18 July 2007 on Addressing the challenge of water scarcity and droughts in the European Union, of 14 November 2012 on A Blueprint to Safeguard Europe’s Water Resources and of 11 March 2019 on European Union Strategic Approach to Pharmaceuticals in the Environment.
According to article 2 paragraph 1(10) of the Taxonomy Regulation, pollutant means a substance, vibration, heat, noise, light or other contaminant present in air, water or land which may be harmful to human health or the environment, which may result in damage to material property, or which may impair or interfere with amenities and other legitimate uses of the environment.
Article 2, points (15) and (13), respectively. According to article 2 paragraph 1(14) of the Taxonomy Regulation, the term ‘ecosystem services’ is defined to mean the direct and indirect contributions of ecosystems to the economic, social, cultural and other benefits that people derive from those.
Under article 10 of Taxonomy Regulation ‘… An economic activity shall qualify as contributing substantially to climate change mitigation where that activity contributes substantially to the stabilisation of greenhouse gas concentrations in the atmosphere at a level which prevents dangerous anthropogenic interference with the climate system consistent with the long-term temperature goal of the Paris Agreement through the avoidance or reduction of greenhouse gas emissions or the increase of greenhouse gas removals, including through process innovations or product innovations, by: (a) generating, transmitting, storing, distributing or using renewable energy in line with Directive (EU) 2018/2001, including through using innovative technology with a potential for significant future savings or through necessary reinforcement or extension of the grid; (b) improving energy efficiency, except for power generation activities as referred to in Article 19(3); (c) increasing clean or climate-neutral mobility; (d) switching to the use of sustainably sourced renewable materials; (e) increasing the use of environmentally safe carbon capture and utilisation (CCU) and carbon capture and storage (CCS) technologies that deliver a net reduction in greenhouse gas emissions; (f) strengthening land carbon sinks, including through avoiding deforestation and forest degradation, restoration of forests, sustainable management and restoration of croplands, grasslands and wetlands, afforestation, and regenerative agriculture; (g) establishing energy infrastructure required for enabling the decarbonisation of energy systems; (h) producing clean and efficient fuels from renewable or carbon-neutral sources; or (i) enabling any of the activities listed in points (a) to (h) of this paragraph in accordance with Article 16’.
Under article 11 of Taxonomy Regulation ‘… An economic activity shall qualify as contributing substantially to climate change adaptation where that activity: (a) includes adaptation solutions that either substantially reduce the risk of the adverse impact of the current climate and the expected future climate on that economic activity or substantially reduce that adverse impact, without increasing the risk of an adverse impact on people, nature or assets; or (b) provides adaptation solutions that, in addition to satisfying the conditions set out in Article 16, contribute substantially to preventing or reducing the risk of the adverse impact of the current climate and the expected future climate on people, nature or assets, without increasing the risk of an adverse impact on other people, nature or assets. 2. The adaptation solutions referred to in point (a) of paragraph 1 shall be assessed and ranked in order of priority using the best available climate projections and shall, at a minimum, prevent or reduce: (a) the location-specific and context-specific adverse impact of climate change on the economic activity; or (b) the potential adverse impact of climate change on the environment within which the economic activity takes place’.
Under article 12 of Taxonomy Regulation ‘… An economic activity shall qualify as contributing substantially to the sustainable use and protection of water and marine resources where that activity either contributes substantially to achieving the good status of bodies of water, including bodies of surface water and groundwater or to preventing the deterioration of bodies of water that already have good status, or contributes substantially to achieving the good environmental status of marine waters or to preventing the deterioration of marine waters that are already in good environmental status, by: (a) protecting the environment from the adverse effects of urban and industrial waste water discharges, including from contaminants of emerging concern such as pharmaceuticals and microplastics, for example by ensuring the adequate collection, treatment and discharge of urban and industrial waste waters; (b) protecting human health from the adverse impact of any contamination of water intended for human consumption by ensuring that it is free from any micro-organisms, parasites and substances that constitute a potential danger to human health as well as increasing people’s access to clean drinking water; (c) improving water management and efficiency, including by protecting and enhancing the status of aquatic ecosystems, by promoting the sustainable use of water through the long-term protection of available water resources, inter alia, through measures such as water reuse, by ensuring the progressive reduction of pollutant emissions into surface water and groundwater, by contributing to mitigating the effects of floods and droughts, or through any other activity that protects or improves the qualitative and quantitative status of water bodies; (d) ensuring the sustainable use of marine ecosystem services or contributing to the good environmental status of marine waters, including by protecting, preserving or restoring the marine environment and by preventing or reducing inputs in the marine environment; or (e) enabling any of the activities listed in points (a) to (d) of this paragraph in accordance with Article 16’.
Under article 13 of Taxonomy Regulation ‘... An economic activity shall qualify as contributing substantially to the transition to a circular economy, including waste prevention, re-use and recycling, where that activity: (a) uses natural resources, including sustainably sourced bio-based and other raw materials, in production more efficiently, including by: (i) reducing the use of primary raw materials or increasing the use of by-products and secondary raw materials; or (ii) resource and energy efficiency measures; (b) increases the durability, reparability, upgradability or reusability of products, in particular in designing and manufacturing activities; (c) increases the recyclability of products, including the recyclability of individual materials contained in those products, inter alia, by substitution or reduced use of products and materials that are not recyclable, in particular in designing and manufacturing activities; (d) substantially reduces the content of hazardous substances and substitutes substances of very high concern in materials and products throughout their life cycle, in line with the objectives set out in Union law, including by replacing such substances with safer alternatives and ensuring traceability; (e) prolongs the use of products, including through reuse, design for longevity, repurposing, disassembly, remanufacturing, upgrades and repair, and sharing products; (f) increases the use of secondary raw materials and their quality, including by high-quality recycling of waste; (g) prevents or reduces waste generation, including the generation of waste from the extraction of minerals and waste from the construction and demolition of buildings; (h) increases preparing for the re-use and recycling of waste; (i) increases the development of the waste management infrastructure needed for prevention, for preparing for re-use and for recycling, while ensuring that the recovered materials are recycled as high-quality secondary raw material input in production, thereby avoiding downcycling; (j) minimises the incineration of waste and avoids the disposal of waste, including landfilling, in accordance with the principles of the waste hierarchy; (k) avoids and reduces litter; or (l) enables any of the activities listed in points (a) to (k) of this paragraph in accordance with Article 16’.
Under article 14 of Taxonomy Regulation ‘… An economic activity shall qualify as contributing substantially to pollution prevention and control where that activity contributes substantially to environmental protection from pollution by: (a) preventing or, where that is not practicable, reducing pollutant emissions into air, water or land, other than greenhouse gasses; (b) improving levels of air, water or soil quality in the areas in which the economic activity takes place whilst minimising any adverse impact on, human health and the environment or the risk thereof; (c) preventing or minimising any adverse impact on human health and the environment of the production, use or disposal of chemicals; (d) cleaning up litter and other pollution; or (e) enabling any of the activities listed in points (a) to (d) of this paragraph in accordance with Article 16’.
Under article 15 of Taxonomy Regulation ‘… An economic activity shall qualify as contributing substantially to the protection and restoration of biodiversity and ecosystems where that activity contributes substantially to protecting, conserving or restoring biodiversity or to achieving the good condition of ecosystems, or to protecting ecosystems that are already in good condition, through: (a) nature and biodiversity conservation, including achieving favourable conservation status of natural and semi-natural habitats and species, or preventing their deterioration where they already have favourable conservation status, and protecting and restoring terrestrial, marine and other aquatic ecosystems in order to improve their condition and enhance their capacity to provide ecosystem services; (b) sustainable land use and management, including adequate protection of soil biodiversity, land degradation neutrality and the remediation of contaminated sites; (c) sustainable agricultural practices, including those that contribute to enhancing biodiversity or to halting or preventing the degradation of soils and other ecosystems, deforestation and habitat loss; (d) sustainable forest management, including practices and uses of forests and forest land that contribute to enhancing biodiversity or to halting or preventing degradation of ecosystems, deforestation and habitat loss; or (e) enabling any of the activities listed in points (a) to (d) of this paragraph in accordance with Article 16’.
Under article 19 of Taxonomy Regulation, ‘… The technical screening criteria established pursuant to Articles 10(3), 11(3), 12(2), 13(2), 14(2) and 15(2) shall: (a) identify the most relevant potential contributions to the given environmental objective while respecting the principle of technological neutrality, considering both the short- and long-term impact of a given economic activity; (b) specify the minimum requirements that need to be met to avoid significant harm to any of the relevant environmental objectives, considering both the short- and long-term impact of a given economic activity; (c) be quantitative and contain thresholds to the extent possible, and otherwise be qualitative; (d) where appropriate, build upon Union labelling and certification schemes, Union methodologies for assessing environmental footprint, and Union statistical classification systems, and take into account any relevant existing Union legislation; (e) where feasible, use sustainability indicators as referred to in Article 4(6) of Regulation (EU) 2019/2088; (f) be based on conclusive scientific evidence and the precautionary principle enshrined in Article 191 TFEU; (g) take into account the life cycle, including evidence from existing life-cycle assessments, by considering both the environmental impact of the economic activity itself and the environmental impact of the products and services provided by that economic activity, in particular by considering the production, use and end of life of those products and services; (h) take into account the nature and the scale of the economic activity, including: (i) whether it is an enabling activity as referred to in Article 16; or (ii) whether it is a transitional activity as referred to in Article 10(2); (i) take into account the potential market impact of the transition to a more sustainable economy, including the risk of certain assets becoming stranded as a result of such transition, as well as the risk of creating inconsistent incentives for investing sustainably; (j) cover all relevant economic activities within a specific sector and ensure that those activities are treated equally if they contribute equally towards the environmental objectives set out in Article 9 of this Regulation, to avoid distorting competition in the market; and (k) be easy to use and be set in a manner that facilitates the verification of their compliance. Where the economic activity belongs to one of the categories referred to in point (h), the technical screening criteria shall clearly indicate that fact … The technical screening criteria referred to in paragraph 1 shall also include criteria for activities related to the clean energy transition consistent with a pathway to limit the temperature increase to 1,5 0C above pre-industrial levels, in particular energy efficiency and renewable energy, to the extent that those activities substantially contribute to any of the environmental objectives … The technical screening criteria referred to in paragraph 1 shall ensure that power generation activities that use solid fossil fuels do not qualify as environmentally sustainable economic activities … The technical screening criteria referred to in paragraph 1 shall also include criteria for activities related to the switch to clean or climate-neutral mobility, including through modal shift, efficiency measures and alternative fuels, to the extent that those are substantially contributing to any of the environmental objectives…’.
Pursuant to article 17(1) of Taxonomy Regulation, ‘… taking into account the life cycle of the products and services provided by an economic activity, including evidence from existing life-cycle assessments, that economic activity shall be considered to significantly harm: (a) climate change mitigation, where that activity leads to significant greenhouse gas emissions; (b) climate change adaptation, where that activity leads to an increased adverse impact of the current climate and the expected future climate, on the activity itself or on people, nature or assets; (c) the sustainable use and protection of water and marine resources, where that activity is detrimental: (i) to the good status or the good ecological potential of bodies of water, including surface water and groundwater; or (ii) to the good environmental status of marine waters; (d) the circular economy, including waste prevention and recycling, where: (i) that activity leads to significant inefficiencies in the use of materials or in the direct or indirect use of natural resources such as non-renewable energy sources, raw materials, water and land at one or more stages of the life cycle of products, including in terms of durability, reparability, upgradability, reusability or recyclability of products; (ii) that activity leads to a significant increase in the generation, incineration or disposal of waste, with the exception of the incineration of non-recyclable hazardous waste; or (iii) the long-term disposal of waste may cause significant and long-term harm to the environment; (e) pollution prevention and control, where that activity leads to a significant increase in the emissions of pollutants into air, water or land, as compared with the situation before the activity started; or (f) the protection and restoration of biodiversity and ecosystems, where that activity is: (i) significantly detrimental to the good condition and resilience of ecosystems; or (ii) detrimental to the conservation status of habitats and species, including those of Union interest’. 32 Article 16 of Taxonomy Regulation.
Article 10(2) of Taxonomy Regulation.
For the definition of financial market participants, the Taxonomy Regulation refers to article 2 paragraph 1(1) of the SFDR, under which ‘financial market participant means: (a) an insurance undertaking which makes available an insurance-based investment product (IBIP); (b) an investment firm which provides portfolio management; (c) an institution for occupational retirement provision (IORP); (d) a manufacturer of a pension product; (e) an alternative investment fund manager (AIFM); (f) a pan-European personal pension product (PEPP) provider; (g) a manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013; (h) a manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013; (i) a management company of an undertaking for collective investment in transferable securities (UCITS management company); or (j) a credit institution which provides portfolio management’. Also a manufacturer of a pension product to which a Member State has decided to apply the SFDR is considered a financial market participant.
For the definition of issuer, the Taxonomy Regulation refers to point (h) of Article 2 of Regulation (EU) 2017/1129 of the European Parliament and of the Council under which an issuer is ‘a legal entity which issues or proposes to issue securities’.
Article 1(2) of Taxonomy Regulation.
Article 5 of Taxonomy Regulation also states that such description ‘shall specify the proportion of investments in environmentally sustainable economic activities selected for the financial product, including details on the proportions of enabling and transitional activities referred to in Article 16 and Article 10(2), respectively, as a percentage of all investments selected for the financial product’.
Article 6 of Taxonomy Regulation.
Article 7 of Taxonomy Regulation.
Article 8 of Taxonomy Regulation.
Article 21 of Taxonomy Regulation.
Article 22 of Taxonomy Regulation.
For a legal analysis of the SFDR see Busch, Sustainability Disclosure in the EU Financial Sector, European Banking Institute Working Paper Series 2020 n. 70, passim.
According to article 2(1) of the SFDR, ‘financial market participant means: (a) an insurance undertaking which makes available an insurance-based investment product (IBIP); (b) an investment firm which provides portfolio management; (c) an institution for occupational retirement provision (IORP); (d) a manufacturer of a pension product; (e) an alternative investment fund manager (AIFM); (f) a pan-European personal pension product (PEPP) provider; (g) a manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013; (h) a manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013; (i) a management company of an undertaking for collective investment in transferable securities (UCITS management company); or (j) a credit institution which provides portfolio management’.
According to article 2(11) of the SFDR, ‘financial adviser means: (a) an insurance intermediary which provides insurance advice with regard to IBIPs; (b) an insurance undertaking which provides insurance advice with regard to IBIPs; (c) a credit institution which provides investment advice; (d) an investment firm which provides investment advice; (e) an AIFM which provides investment advice in accordance with point (b)(i) of Article 6(4) of Directive 2011/61/EU; or (f) a UCITS management company which provides investment advice in accordance with point (b)(i) of Article 6(3) of Directive 2009/65/EC’.
According to article 2(12) of the SFDR, ‘financial product means: (a) a portfolio managed in accordance with point (6) of this Article; (b) an alternative investment fund (AIF); (c) an IBIP; (d) a pension product; (e) a pension scheme; (f) a UCITS; or (g) a PEPP’.
Article 2(22) of SFDR.
Article 3 of SFDR.
Article 6 of SFDR.
Article 5 of SFDR.
Article 2(24) of SFDR.
Article 4(1) of SFDR.
Article 4(5) of SFDR.
Article 7 of SFDR.
Article 2(17) of the SFDR.
Id.
Article 8 of SFDR.
Article 9 of SFDR also states that where a financial product has sustainable investment as its objective and no index has been designated as a reference benchmark, the information to be disclosed shall include an explanation on how that objective is to be attained, while where a financial product has a reduction in carbon emissions as its objective, the information to be disclosed shall include the objective of low carbon emission exposure in view of achieving the long-term global warming objectives of the Paris Agreement.
Article 11 of SFDR.
Article 10 of SFDR.
Recital 15 of Taxonomy Regulation.
Article 7 of SFDR.
See Avgouleas, Resolving the sustainable finance conundrum: activist policies and financial technology, University of Edinburgh – School of Law, Research Paper Series n. 2021/02, passim.