Sustainability and responsible investing have become indispensable components of the financial landscape. To regulate and promote these aspects, the European Union has introduced various frameworks and regulations. In this blog post, we will take a closer look at three of these key concepts: the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), and the Sustainable Finance Disclosure Regulation (SFDR).
EU Taxonomy: A comprehensive classification for green investments
The EU Taxonomy serves as a single classification system to determine which economic activities can be considered environmentally sustainable. It defines six main environmental objectives: Mitigation and adaptation to climate change, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. This classification will make it easier for investors to objectively evaluate sustainable investments and thus make informed decisions.
CSRD: Increased transparency for companies and their sustainability efforts
The CSRD places a particular emphasis on companies reporting on their sustainability performance. It requires disclosure of information on a wide range of topics, including environmental impacts, social and employee issues, respect for human rights, anti-corruption and bribery issues. This ensures comprehensive and transparent reporting that helps investors better evaluate and compare a company's sustainability performance.
SFDR: Enhanced transparency in the financial sector
The SFDR aims to improve the transparency of financial products. It requires financial market participants to disclose detailed information about the sustainability risks of their products. This must include negative impacts on sustainability as well as information on how these risks are incorporated into investment decision-making processes. This creates more clarity for investors and promotes trust in sustainable financial products.
The synergy of EU taxonomy, CSRD and SFDR.
The three aforementioned instruments, EU Taxonomy, CSRD and SFDR, complement each other and work together to create a transparent, credible and consistent framework for sustainable finance. Through the EU Taxonomy, a common understanding of 'green' or 'sustainable' is created. The CSRD extends this understanding at the corporate level by requiring comprehensive reporting on sustainability practices. And the SFDR ensures that financial products are assessed and presented transparently in terms of their sustainability. Together, they create a coherent framework that makes it easier for investors, companies and the public to understand, compare and make informed decisions about sustainable financial products.
To whom do which regulations apply?
The EU taxonomy is relevant to all economic actors who wish to undertake or finance sustainable activities, including financial market participants, companies, investors and policymakers.
For now, the CSRD affects all large companies and public interest entities in the EU, including banks and insurance companies. It sets out reporting requirements for non-financial information. In the coming years, the CSRD will be extended to all SMEs and large companies operating in Europe.
The SFDR is specifically targeted at financial market participants and financial advisors. It aims to promote disclosure of information on the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes.
EU Sustainable finance taxonomy factsheet