On 18 June 2020, the European Parliament adopted the so-called Taxonomy Regulation [1].  Following the adoption of the Disclosure Regulation [2] at the end of 2019, this is a further key milestone in the development of the EU's legal and regulatory framework related to Environmental, Social and Governance (ESG) factors that impacts the asset management sector. 

In this spotlight, we look at the key takeaways for asset managers, private equity houses, and hedge funds coming out of the adoption of the Taxonomy Regulation.  

Application of the Taxonomy Regulation 

The Taxonomy Regulation applies to "financial market participants" as defined in the Disclosure Regulation [3].  This includes alternative investment fund managers (AIFMs) and UCITS Management Companies as well as MiFID firms providing portfolio management (collectively referred to as "Asset Managers" in this note). In practice, therefore, this new regulation will be of relevance to traditional asset managers, private equity houses, hedge funds and UCITS management companies.

Environmental objectives defined 

The Taxonomy Regulation establishes an EU-wide taxonomy of economic activities that can be viewed as environmentally sustainable by reference to six environmental objectives. This will enable Asset Managers to make (and their investors and clients to identify) environmentally sustainable investments. The six objectives are defined as:

  • climate change mitigation;
  • climate change adaptation;
  • the sustainable use and protection of water and marine resources;
  • the transition to a circular economy [4];
  • pollution prevention and control; and
  • the protection and restoration of biodiversity and ecosystems.

Given the increased demand by investors for ESG compliant investment products, the taxonomy is a significant step towards creating a common understanding between Asset Managers, their investors and clients and investee companies as to which activities really are "green".  Whilst for now the taxonomy is limited to environmental objectives, the recent Covid-19 pandemic is likely to accelerate the development of a social and governance focussed taxonomy too.

Further positive and negative disclosure requirements 

From March 2021, the Disclosure Regulation will impose a number of requirements on Asset Managers relating to website, pre-contractual and periodic disclosures. These disclosure requirements apply both at a firm level and financial product level (this includes AIFs, UCITS and portfolio management services). The Taxonomy Regulation makes targeted amendments to the Disclosure Regulation. It requires further pre-contractual and periodic reporting disclosures, especially for financial products that promote environmental characteristics or have an express objective of sustainable investment and contribute to environmental objectives.  Asset Managers will be obliged to include: 

"information on the environmental objective or environmental objectives set out in … [the] Regulation to which the investment underlying the financial product contributes; and … a description of how and to what extent the investments underlying the financial product are in economic activities that qualify as environmentally sustainable under … [the] Regulation." [5]

However, it is not just environmentally focussed financial products that are in scope. For any financial product that does not have an environmental focus, a negative disclosure will need to be made stating that the investments underlying the financial product do not take into account the EU criteria for environmentally sustainable investments.  To that end, the Taxonomy Regulation sets out the following proscribed statement that must be included with the financial product: 

"The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities." [6] 

New Reporting Requirements for Large Public Interest Entities 

The Taxonomy Regulation also adds new reporting requirements that will apply to Large Public Interest Entities. [7] These entities will need to include in non-financial statements information on how, and to what extent their activities are associated with environmentally sustainable economic activities by reference to the taxonomy. Some Asset Managers may themselves be Large Public Interest Entities. More significantly, many financial products promoted by Asset Managers will hold investment positions in Large Public Interest Entities.

Important Details still to come

Like the Disclosure Regulation, the Taxonomy Regulation is a framework regulation. Considerable detail remains to be filled in by secondary legislation in the form of delegated acts. These will be adopted in phases from December 2020 this year and beyond. Asset Managers should also be aware of the on-going work by ESMA and the other European Supervisory Authorities on fleshing out the requirements under the Disclosure Regulation. Of particular note is the current consultation on ESG disclosures which is set to close on 1 September 2020. [8]  

The interplay between the Disclosure Regulation and the Taxonomy Regulation and the phased application of key disclosure and reporting pieces is complex.  A high level timeline charting out the key milestones can be found at the end of this briefing.


The transition period under the EU Withdrawal Agreement between the UK and the EU is set to end on 31 December 2020. Given that the substantive obligations under both the Disclosure Regulation and the Taxonomy Regulation will be phased in from March 2021, UK based Asset Managers may query whether and to what extent the new rules will apply to them. The UK Government's stated intention is to on-shore certain key in-flight EU financial services regulations, such as the Disclosure Regulation and the Taxonomy Regulation, although it has yet to introduce the necessary legislative instruments for this.  Industry has previously lobbied the UK Government to avoid the creation of a dual compliance regime when it comes to ESG-rules affecting Asset Managers.

Regardless, UK based Asset Managers that wish to continue marketing into Europe after the end of the transition period should aim to bring themselves into compliance with the EU regime as the reach of the EU's measures extends to non-EU firms. 

Next steps

Whilst important details remain to be worked out, the general scope of the requirements and the key application dates are now known.  Notwithstanding Brexit creating a degree of uncertainty as to the direct applicability of the new regime in the UK, Asset Managers would be well advised to operate on the basis that the new regime will either directly or indirectly be applicable to them. With that in mind and the clock ticking down to March 2021 when several key disclosure requirements will start applying, Asset Managers should now be assessing how they will be impacted and start planning for compliance accordingly.

If you would like to know more about how we can support you, please contact any of the AG team below or your usual AG contact. 

You may also be interested in listening to our recent audio podcast on "ESG & Asset Managers" which can be accessed here


[1] Regulation (Eu) 2020/… of the European Parliament and of the council of … on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (2088 (final citations to be confirmed on publication in final form in the Official Journal of the European Union in due course).  The final draft text available here

[2] Regulation (EU) 2019/2088 Of The European Parliament And Of The Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector, text available here.

[3] Article 2(1), Disclosure Regulation. 

[4] Examples of 'circular economy' are given at recital 28 to the Taxonomy Regulation and includes economic activity that "increase[s] the durability, reparability, upgradability and reusability of products, or ... reduce[s] the use of resources through the design and choice of materials, facilitating repurposing, disassembly, and deconstruction in the buildings and construction sector, in particular, to reduce the use of building materials and promote the reuse of building materials ... reduc[es] food waste in the production, processing, manufacturing or distribution of food."

[5] Article 5, Taxonomy Regulation.

[6] Article 7, Taxonomy Regulation.

[7] These are EU domiciled entities with securities listed on an EU regulated market, credit institutions, insurance undertakings and any other entity designated as a public interest entity by a Member State and in each case also meet certain quantitative tests.

[8] Joint Consultation Paper, ESG Disclosures (JC 2020 16), dated 23 April 2020, available here.

Key contacts

Meet the team
Lorna Finlayson

Lorna Finlayson

Partner, Financial Regulation

View profile
Jan Gruter

Jan Gruter

Partner, Funds Establishment and Structuring

View profile
Richard Small

Richard Small

Partner, Financial Regulation
London, UK

View profile