The Hitchhiker's Guide to the EU Taxonomy (& SFDR)

The creation of this EU sustainable finance legislation is sometimes compared to the manufacturing of an electric car: right now the cables and wires are all over the place, but once it's done, we can drive off smoothly with the press of a button.

But why wait for the electric car to be finished if we can already start hitchhiking? In the famous novel, The Hitchhiker's Guide of the Galaxy, the story's great Encyclopaedia Galactica was supplanted as the repository of all knowledge and wisdom by a guide that was slightly cheaper and had the words 'DON'T PANIC' inscribed in large, friendly letters on its cover. There is no reason to panic here either, and below follows a hitchhiker's guide to the latest SFDR and EU Taxonomy and how financial institutions can navigate the dynamic road ahead. We don't have much time to lose.

Quick recap

The Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation (EUT) are cornerstones of the EU's Sustainable Finance Strategy.

While the regulations have entered into force, their reporting requirements and to which financial institutions (and advisors) they apply to and by when are still in flux.

Why should financial institutions start hitting the road?

By taking early action now and preparing for incoming regulations, financial institutions can:

• Show industry leadership on emerging climate standards
• Prepare your investment and ESG teams on how to best leverage the SFDR and the EU Taxonomy
• Start engaging with your investments so they can start preparing and setting processes for data collection and estimations
• Prevent accusations of greenwashing by backing your disclosures with the robust KPI's and data that will be expected from regulators in the future
• Have an experienced voice in ongoing regulatory consultations and decision making of the in-flux universe

How can South Pole help?

We are sustainable finance and climate specialists. We can help you navigate current reporting requirements, and pave the way for future ones.

• We provide EU sustainable finance regulatory workshops to help you prepare for data collection and disclosure and to understand how to leverage these disclosures to achieve broader sustainable finance goals.
• We perform SFDR art. 8 and art 9 screening, including sustainability benchmarking and validating fund objectives, aligned with the latest technical guidelines for financial institutions.
• We also perform EU taxonomy assessments which will help reveal your eligibility and alignment percentages. Our sustainable finance specialists have sifted through all the latest delegated acts and amendments, while our environmental specialists can help deep-dive on the environmental technical screening criteria.
• We highlight data gaps and help you make informed, science-based estimations.
• You will receive recommendations to improve your sustainability data and performance.
• We can embed your SFDR and EU Taxonomy work into other rep/orting and target-setting needs, such as net zero target setting using IIGCC and/or SBTi for FIs.

Conclusion

The EU Taxonomy is a dynamic piece of legislation which can sometimes feel like a space jungle of acronyms and legislation stacks. Similarly, financial accounting and disclosure standards have taken many decades and overlapping initiatives to develop. For example, to this day US GAAP and international accounting bodies have not fully converged and remain to some degree in flux. Ambitious sustainability standards can be expected to develop similarly, but we have little time to lose. New mindsets and navigation tools can help us start hitching rides while the vehicle is being finished.

Written thanks to contributions from Shrieya Mehra and Andrea Crosswell Patlan.