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Recent developments show how innovative sustainable finance instruments can help the transition to greener financial markets.

By Paul A. Davies and Edward R. Kempson

The EU Taxonomy Regulation[1] (the Regulation), which entered into force in July 2020, is one of the most significant developments in sustainable finance. The Regulation creates a classification system for green and sustainable economic activities (the Taxonomy) that is intended to be used by market participants in the EU and beyond to navigate the transition to a low-carbon, resilient, and resource-efficient economy. Under the Taxonomy, in order for an economic activity to be classified as “green”, it must (i) substantially contribute to one of six environmental objectives,[2] (ii) do no significant harm to the other five objectives, (iii) comply with certain governance safeguards,[3] and (iv) comply with specific science-based performance thresholds (or “technical screening criteria”).

By Paul Davies

Environmental issues are global issues. To navigate the environmental aspects of international business operations, companies must look at the entire lifecycle of a product – the global supply chain – and the legal issues and reputational risk associated with compliance.

For example, a business looking to acquire a target with operations in different jurisdictions could trigger the need for environmental investigations, and an acquirer will need to consider:

  • Which jurisdictions the assets or shares are in and how the business is structured.
  • Where component parts are sourced and whether those components are legal in all jurisdictions in which the business is located.
  • The scope of due diligence required for the transaction.
  • How to assess liabilities based on former, current and future operations by understanding product life-related issues, such as where materials in the manufacturing process are sourced from and how the business disposes of such materials.

By proactively identifying environmental issues and leveraging high quality environmental advice, an acquirer may be able to negotiate reps and warranties and determine whether there will be any indemnities or price chips.  Similarly, a business engaged in the financing of a large-scale project may also be impacted by environmental issues should the Equator Principles come into play (or other provisions such as OECD guidelines).