​​EU Green Taxonomy and NFR Directive update: key takeaways

Originally published on Linkedin on 26 June 2019  - By Donato Calace

June has been a hot month for policy making around sustainable finance. The EU Technical Expert Group (TEG) published four pivotal reports for the implementation of the EU Commission Action Plan on Sustainable Finance:

Appropriately enough, the day the Commission hosted the Stakeholder Dialogue session (24th of June) was unbelievably hot for Brussels (31 degrees!) – if only to remind everyone that the time for climate action is now.

Once into force, those policies (the EU Taxonomy in particular) will have a dramatic impact on how the finance ecosystem works – and I have three main reasons for that:

  1. Focus on activities
  2. More transparency and disclosure
  3. Data availability


The Taxonomy is a list of economic activities which can make a substantial contribution to climate change mitigation and criteria to do no significant harm to other environmental objectives.

​1. Focus on activities

Unlike other approaches such as the Sustainability Accounting Standards Board (SASB), which lists material issues and associated accounting metrics per sector, this taxonomy looks at each of your business activities in a lot more detail. This means that a company can perform some activities that fall within the taxonomy, while others do not.

Investors will therefore need to assess the percentage of revenue that is coming from, or capital expenditure that is invested in, those activities in the taxonomy. Example: revenues from the sale of hybrid cars fall within the taxonomy while revenues from the sale of traditional cars will not.

You can hear a concrete example explained by TEG’s Nancy Saich here.

2. More transparency and disclosure

The Taxonomy introduces new disclosure obligations for investors. They will need to report on:

  •      If and how the taxonomy has been used.
  •      The proportion of investment funding the taxonomy-eligible activities.

Applying to relevant financial products, the taxonomy affects investors based anywhere in the world selling financial products in the EU. This will most likely create a standardization effect: if a US-based asset owner has a financial product (e.g. a bond that finances "green" activities) offered in the EU, the US, and Asia, they will probably use the EU requirements across all geographies to avoid fragmentation of their product.

This ultimately means that the kind of disclosures investors will expect from companies is going to change substantially. Not by chance, the new non-binding guidelines to the NFRD recommend alignment to the Taxonomy, but, more importantly, the next commission is poised to have a mandate on reviewing the NFRD. With a wide variety of investors involved, from asset managers to venture capitalists to retail banking products such as loans and mortgages, these disclosures’ expectations concern not only large and listed companies, but also smaller companies.

​3. Data availability

Clearly, this amount of data on a business’s activity, and the level of detail required, poses critical challenges. As such, there is a dedicated section in the TEG report concerning “Data: availability analysis and results” (p. 71).

Besides taking note of the current unpreparedness of companies to respond to such disclosure requirements (“The main challenge the application of the Taxonomy faces is that very few companies break out information on green revenues in line with any recognized framework”), it is clear that technology and automation will play a crucial role in the implementation of the taxonomy. 

Technological enablers like Datamaran, leveraging Natural Language Processing to automatically extract and analyze relevant information from different sources, will have a key role in bridging the informational gap between investors and companies - and the only way to avoid additional investor surveys.

​Next steps

Investors will soon have a new system of incentives to demonstrate how their investment strategies contribute to environmental goals. The Taxonomy creates an ecosystem where market actors can assess which financial products are actually contributing towards the climate goals. In other terms, it's not transparency for the sake of transparency – it's usable.

If ever there were a doubt as to the relevance and significance of the Task Force on Climate-related Financial Disclosures (TCFD) to your company’s practices, the Taxonomy will be transposed into regulation around October 19. This is not a project – it's the new status quo, the new norm. This is the immediate future of disclosure.

While TEG extended its mandate to the end of 2019, it will be succeeded by a permanent Platform for Sustainable Finance, with the task of maintaining, expanding, and evolving the Taxonomy. 

In view of the changes, we will be hosting a webinar to discuss the impact of the EU NFR Directive on business this week. We will update you on the discussion in the coming days.

I hope this is a useful summary of how the EU Sustainable Finance Action Plan will encourage an increasingly responsible approach to business. If you’d like to talk about how those new policies will affect your company, or you’d like to discuss my findings from the European Commission’s stakeholder dialogue in more detail, please contact me.


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