The EU Taxonomy

As SDGs, ESG investments, and green finance are expanding worldwide, sustainable finance is increasingly being standardized and simplified in recent years. International frameworks for sustainable finance, such as the EU Taxonomy, the environmental standards of the International Organization for Standardization (ISO), the Green Bond Principles (GBP) under the International Capital Markets Association (ICMA), and the Green Loan Principles (GLP), have been established. Among these trends, the EU taxonomy is the most important.

The EU taxonomy serves as the basis for sustainable finance in the EU, which encourages investors and companies to move toward a low-carbon, resilient, and resource-efficient economy. Its objective is to establish standards for investors and enterprises to determine sustainable investments by classifying “green” sectors (environmentally sustainable economic activities). As EUR 275 billion of additional investments are needed per year by 2030 in order to achieve target of EU Green Deal, “near-zero green house gas emissions and carbon neutral by 2050” , the establishment and implementation of the EU taxonomy is necessary. The EU taxonomy is the basis of the EU action plan on Sustainable Finance, which was established to stimulate the needed investment from private funds（i）（ii）（iii）（iv）.

Based on the EU taxonomy, investors (organizations participating in the European financial markets) will be required to disclose information in accordance with the rules when offering financial products in Europe. In addition, companies subject to the Non-Financial Disclosure Directive (NFRD) will be required to disclose information as well （ⅴ）.

As shown in the following chart, climate change adaptation and mitigation are the first topics tackled by the taxonomy. The taxonomy requirements are meant to classify contributing economic activities and define related financial indicators in the future. In this way, the aim of EU taxonomy is to promote sustainable finance, meet the EU's commitment to SDGs and the temperature goal of the Paris agreement (target to keep the global average temperature rise below 1.5~2 degrees Celsius compared to before the Industrial Revolution) （ⅵ）.

Task Force on Nature-related Financial Disclosures (TNFD)

Taking the case of COVID-19 as an example, there is a rising awareness about the role of biodiversity loss and nature degradation in the expansion of infectious diseases, and the tremendous impact these have on the economy and business. As a result, there is a growing focus on the conservation of nature and biodiversity, and companies taking action around these themes are highly evaluated. On the backdrop of the increasing interest from institutional investors in the impact of nature loss on the economy and vice versa, the Task Force on Nature-Related Financial Disclosures (TNFD) was launched in order to establish a framework for disclosing information under the leadership of four organizations: the United Nations Environmental Programme Finance Initiative (UNEP FI), the United Nations Development Programme (UNDP), World Wide Fund for Nature (WWF), and the Global Canopy （ⅶ） . As mentioned above, the need for international standards for the evaluation of nature related risk and opportunities and business impacts on biodiversity loss is accelerating the establishment of TNFD. Accordingly, in the financial sector, impact on biodiversity conservation is becoming one of the key perspectives for evaluating companies and making decisions on investments. Therefore, companies will be required to disclose information in order to meet investors needs （ⅷ）.

In the next column, we will cover “Overview of sustainable finance in Japan (diffusion of ESG, initiatives by megabanks, etc.)”.