ICMA compiles proposals to address EU taxonomy usability concerns

The International Capital Market Association (ICMA) has published a paper setting out five recommendations for EU co-legislators and regulators to address usability concerns over the EU taxonomy.

The challenges the proposals seek to address include difficulty in sourcing or estimating required information on alignment, a reliance on EU legislation and criteria in an international market, and the use of an economic activity-based classification system (NACE) for complex projects.

Existing research and market feedback had shown that “the implementation of the EU taxonomy could be seriously impaired by usability issues that we identify in this paper,” it said.

“The EU Taxonomy is an important and ground-breaking project designed to help inform the market and policy makers on their progress towards sustainability,” said Bryan Pascoe, ICMA chief executive officer.

“Our analysis and proposals, produced with the input of ICMA members, are a contribution to the ongoing efforts of many parties to ensure that it can fulfil in practice its intended objective.”

In its paper, ICMA said taxonomy usability issues were highly topical for existing and future reporting under the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD), as well as the upcoming EU Green Bond regulation.

The first three of ICMA’s recommendations are intended to address broad usability concerns for both product alignment and sustainable reporting, it said.

They are:

• to allow flexibility on alignment with taxonomy Do No Significant Harm (DNSH) and Minimum Safeguards provisions in all cases;
• enable a “location-based contextualisation” of the application of technical screening criteria for DNSH and Substantial Contribution provisions; and
• allow estimates and third-party data to be used when taxonomy assessments cannot be otherwise produced or obtained.

On the latter point, it said it recognised that potential inconsistent estimation methodologies could ultimately affect the reliability of taxonomy-alignment assessments, and that guidelines for a common methodology should therefore be developed in consultation with all parties, with a focus on practicality and cost-efficient usability.

ICMA’s other recommendations are aimed at concerns more specific to assessing the taxonomy alignment of green and sustainability bonds. They are to:

• simplify the NACE classification of complex projects funded by green and sustainability bonds, for example via the adoption of a “lead activity(ies)” concept; and
• grandfather the legacy green bond market for green asset/green investment ratio (for banks and big asset managers/owners) and SFDR disclosures.

ICMA’s recommendations take into account existing and emerging efforts to address the usability challenges associated with the EU taxonomy.

The association cited recommendations by the technical expert group that preceded the Platform for Sustainable Finance (PSF), the PSF’s own workstream on taxonomy challenges, the initial methodology used for the ‘Common Ground Taxonomy’, and solutions already proposed by the EU co-legislators to some DNSH challenges under the EU sustainable finance regulations.

ICMA was very clear in stating that its paper was not developed to address questions relating to what should be classified as sustainable and that it was therefore “not topical in relation to the recent Taxonomy Complementary Climate Delegated Act covering certain natural gas and nuclear-related activities”.

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