Publication Of EU Taxonomy Climate Complementary Delegated Act In The Official Journal: Implications For Funds – Fund Management/ REITs

Key Points to Note:

• The EU Taxonomy Climate Complementary Delegated Act has been
  published in the Official Journal and applies from 1 January
  2023




• It extends the EU Taxonomy Framework to permit certain economic
  activities involving gas and nuclear energy to be classified as
  “environmentally sustainable”

Background

The EU Taxonomy Regulation¹ sets down the conditions
which must be met in order for an economic activity to be
considered “environmentally sustainable”. It is
supplemented by a number of delegated acts which set down the
specific technical screening criteria which must be satisfied in
order for an economic activity to be considered environmentally
sustainable.

The first of these delegated acts, referred to as the “EU Taxonomy Climate Delegated
Act²“, entered into force on 1 January 2022 and
sets down the technical screening criteria which must be satisfied
for an economic activity to be considered as contributing to the
environmental objective of climate change mitigation or climate
change adaptation. A separate delegated act, which will set down
the technical screening criteria for the remaining four
environmental objectives identified under the EU Taxonomy
framework³, will be finalised this year and will enter
into force on 1 January 2023.

At the time of its publication last year, the EU Taxonomy
Climate Delegated Act did not provide for the possibility for any
economic activities relating to natural gas or nuclear energy to be
classified as environmentally sustainable under the EU Taxonomy
framework.

However, in February 2022, the European Commission published a
“complementary” delegated act under which it proposed to
extend the EU Taxonomy framework to allow certain economic
activities involving gas and nuclear energy to be classified as
“environmentally sustainable” subject to specific
conditions being met (EU Taxonomy Climate Complementary
Delegated Act).

Publication of EU Taxonomy Climate Complementary Delegated Act
in the Official Journal

Earlier this month, the European Parliament voted not to object to the EU Taxonomy Climate
Complementary Delegated Act. The Council of Europe also held a
right of veto over the proposals put forward by the European
Commission but chose not to exercise this power.

On 15 July 2022, the EU Taxonomy Climate Complementary Delegated
Act was published in the Official Journal of the
European Union. It amends the EU Taxonomy Climate Delegated Act to
set down the technical screening criteria which must be met in
order for an economic activity involving gas or nuclear energy to
be classified as environmentally sustainable under the EU Taxonomy
framework.

Implications for funds falling within the scope of the EU
Taxonomy disclosure obligations

As noted above, the EU Taxonomy framework has now been extended
to permit certain economic activities involving gas and nuclear
energy which meet the technical screening criteria set down in the
amendments made to the EU Taxonomy Climate Delegated Act to be
classified as “environmentally sustainable” (also
referred to as “taxonomy-aligned” economic
activities).

Consequently, funds which fall within the scope of Article 5 or
Article 6 of the Taxonomy Regulation (In-Scope
Funds) will, from 1 January 2023, be able to classify
investments which provide exposure to gas and nuclear energy
activities which satisfy the applicable technical screening
criteria set down in the EU Taxonomy Climate Complementary
Delegated Act as environmentally sustainable investments for the
purposes of calculating and disclosing the extent to which their
portfolio is taxonomy-aligned in their pre-contractual and periodic
report disclosures.

While the EU Taxonomy Climate Complementary Delegated Act itself
does not impose any additional disclosure obligations on In-Scope
Funds, the European Commission had already written to the European Supervisory
Authorities (ESAs) in April 2022 asking them to
revise the existing “level 2” measures adopted by the
European Commission on 6 April 2022 (Existing SFDR Level 2
Measures) to impose additional pre-contractual, website
and periodic report disclosure obligations on all In-Scope Funds on
the exposure of the relevant fund to investments in fossil fuels
and nuclear gas activities. In its letter, the European Commission
indicated that such revised disclosure obligations should require
financial market participants to disclose the proportion such
investments represent within (i) all investments held by In-Scope
Funds and (ii) environmentally sustainable economic activities
invested in by the relevant In-Scope Funds.

The ESAs have been asked to report back to the European
Commission with their suggested amendments to the Existing SFDR
Level 2 Measures by 30 September 2022 at the latest.

As a result, we can expect a revised set of SFDR level 2
measures (including updated pre-

contractual and periodic report template annexes) to be
published by the European Commission before these measures enter
into force on 1 January 2023.

Footnotes

1. Regulation (EU) 2020/852

2. Commission Delegated Regulation (EU)
2021/2139

3. The four remaining environmental objectives comprise
of (i) the sustainable use and protection of water and marine
resources, (ii) the transition to a circular economy, (iii)
pollution prevention and control and (iv) the protection and
restoration of biodiversity and ecosystems.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.