Overview And Scope

This article describes S&P Global Ratings' analytical approach for providing EU Taxonomy Assessments on types of sustainable financing where proceeds are allocated to specific environmental projects. Our EU Taxonomy assessment is a point-in-time analysis that relies on the accuracy, timeliness, and completeness of the information provided by the issuer.

We do not provide any assurance regarding the information provided to us. However, we assess whether the issuer has demonstrated how it meets or expects to meet EU Taxonomy requirements.

Our EU Taxonomy assessment is not a credit rating, does not assess credit quality, and does not factor into our credit ratings.

Our EU Taxonomy Assessment

In our EU Taxonomy assessment, we give our opinion on whether an eligible project to be financed aligns with the EU Taxonomy in cases when the economic activity is covered by technical screening criteria (TSC) that are incorporated into European law via delegated acts.

This analysis aims to help readers see how activities that will be funded by proceeds from a financing framework, or a specific transaction, align with the EU Taxonomy. The EU Taxonomy defines six environmental objectives (EU Objectives):

• Climate change mitigation,
• Climate change adaptation,
• The sustainable use and protection of water and marine resources,
• The transition to a circular economy,
• Pollution prevention and control, and
• The protection and restoration of biodiversity and ecosystems.

Our assessment is organized into the three conditions set by the EU Taxonomy regulation. According to the regulation, to qualify as environmentally sustainable, an activity must have three elements.

• It must make a substantial contribution to at least one of the EU Objectives.
• It must do no significant harm (DNSH) to any other EU Objective.
• The issuer's procedures must meet minimum safeguards.

The substantial contribution and DNSH elements are defined by the EU Taxonomy's TSC. The TSC differentiate activities taking into account the nature and scale of the economic activity, including enabling and transitional activities.

Our focus is on evidence that supports alignment with the three elements. Evidence means there is a commitment in the financing--and in the answers provided by the issuer, its related internal policies, and procedures--that demonstrates the issuer can meet the criteria for the three elements described above.

Alignment of each economic activity with the EU Taxonomy

We consider whether economic activities that can be funded by the financing are aligned or not aligned with the three conditions set by the regulation as per the table below. Our opinion on each of the activities of the financing has three possible outcomes: aligned, not aligned, or not covered by the TSC. An opinion of aligned means that, in our view, the activity and the issuer meet all the EU Taxonomy requirements as per the table below.

Table 1

Applying the substantial contribution and DNSH technical screening criteria to each economic activity

First, we consider whether each economic activity that can be funded by the financing is currently aligned or not aligned with the EU Taxonomy's substantial contribution and DNSH TSC.

If the financing is funding activities that are not currently aligned, we consider whether the issuer's capital expenditure (capex) plan, if available:

• Could help to either expand the issuer's EU Taxonomy-aligned economic activities, or
• Make EU Taxonomy-eligible economic activities EU Taxonomy aligned within five years, following the time frames in Delegated Regulation (EU) 2021/2178.

For example, an issuer could consider increasing its EU Taxonomy-aligned solar generation assets through a capex plan. Alternatively, an issuer could use its capex plan to switch to low-carbon energy sources at its steel manufacturing plant to meet the specified greenhouse gas emissions threshold required by the substantial contribution criteria.

Our opinion on each of the activities of the financing has three possible outcomes for substantial contribution and DNSH: aligned, not aligned, or not covered by the TSC. An opinion of aligned means that, in our view, the activity meets all requirements as per the table below.

Table 2

For each activity, where our assessment does not lead to a clear and conclusive determination that all the relevant TSC are met, we will consider it to be not aligned.

Table 3

For projects that can be funded by the financing that are covered by the TSC, we provide an overview table in the report that shows which criteria these activities are aligned with and which they are not aligned with.

Applying the minimum safeguards to the issuer

We assess whether the issuer's procedures are aligned or not aligned with the minimum safeguards defined in the EU Taxonomy regulation. Our analysis is not subject to ongoing surveillance, so any breach of these safeguards would not automatically trigger a review of our opinion. This assessment is done once for the whole financing framework or transaction document, and not separately for each economic activity.

The EU Taxonomy regulation defines the minimum safeguards as the procedures implemented by an issuer that is carrying out an economic activity to ensure the alignment with guidelines and principles set out in a number of texts. These are: the OECD Guidelines for Multinational Enterprises, the U.N. Guiding Principles on Business and Human Rights, the Declaration of the International Labour Organization on Fundamental Principles and Rights at Work, and the International Bill of Human Rights.

The European Commission's Platform on Sustainable Finance (PSF) has a permanent expert group, which published a Final Report on Minimum Safeguards that provides background information and gives help to companies and investors navigating the minimum safeguards criteria in practice. This report does not represent an official legal interpretation or guidance.

Our minimum safeguards assessment considers whether the issuer is to align with minimum safeguards over the life of the funding, based on the four core components recommended by the PSF. These are:

• Human rights, including workers' rights;
• Bribery/corruption;
• Taxation; and
• Fair competition.

For all the core topics, the PSF recommends assessing whether the issuer has appropriately responded to any court cases that have led to convictions on these topics. It also recommends assessing the issuer's engagement with stakeholders if allegations of breaches have been made.

Our opinion on the issuer's procedures has two possible outcomes: aligned or not aligned, per the table below.

Table 4

Where our assessment does not lead to a clear and conclusive determination that all the relevant minimum safeguards are met, we will consider the financing to be not aligned. We use the external public sources recommended by the PSF to identify those signals of noncompliance with the minimum safeguards. We do not apply a forensic approach to seeking evidence of compliance with all minimum safeguards.

Related Research

• Analytical Approach: European Green Bond External Reviews, Oct. 31, 2024
• FAQ: Applying Our Analytical Approach For European Green Bond External Reviews, Oct. 31, 2024
• Analytical Approach: Second Party Opinions: Use Of Proceeds, July 27, 2023
• Analytical Approach: Shades Of Green Assessments, July 27, 2023
• FAQ: Applying Our Integrated Analytical Approach For Use-Of-Proceeds Second Party Opinions, July 27, 2023