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Incorporation of SFDR regulations and evaluation of EU taxonomy compliance in our ESG ratings

Regulatory pressure on the financial sector is increasing in the fight against climate change and with the demand for greater transparency. We have therefore expanded our rating criteria in line with the requirements of the SFDR and the EU taxonomy. Let’s take a look at what this means.


In Spring 2022, the European Parliament issued a press release stating that its members had agreed on draft rules for the oversight, consumer protection, and environmental sustainability of crypto assets. The gloomy news of recent months - think of the bankruptcy filings of crypto exchanges FTX, BlockFi, or the crypto bank Celsius and the collapse of Terra Luna within 24 hours - have further fueled the demand for a unified regulatory framework for crypto assets.


The current lack of transparency in the crypto universe is a core argument in the calls for more regulatory oversight.

As part of the European Green Deal, the EU has issued various directives for the financial sector, most notably MiFID II, the Sustainable Finance Disclosure Regulation (SFDR) [1], and the EU Taxonomy. Although it has not yet been finally clarified to what extent the new rules will apply to crypto assets, it can be assumed that the crypto sector will face increased regulation in the near future.

 

Markets in Financial Instruments Directive 2014/65/EU ("MiFID II")

In response to the 2008 financial crisis, this directive aims to enhance financial stability and investor protection while increasing market efficiency and competition. Under MiFID II, investment firms must conduct suitability assessments, taking into account certain factors that enable them to recommend suitable products and financial instruments to clients and potential clients.


Sustainable Finance Disclosure Regulation (SFDR)

This regulation aims to improve the transparency of sustainable investment products, prevent greenwashing, and increase the transparency of sustainability claims made by EU-regulated asset managers, financial advisers, and certain non-EU asset managers. Among other things, it prescribes comprehensive disclosure requirements for a broad range of environmental, social, and governance (ESG) criteria at the company and product levels.


Under the SFDR, funds and financial products advertised or labeled as ESG must meet the requirements for one of three classifications (Articles 6, 8, or 9) [2]. The articles build on each other, i.e. the requirements of the preceding article must be met in order to achieve the next level. Products and funds falling under Articles 8 and 9 are considered sustainable, with Article 9 providing more restrictive criteria.

  • Article 6: This is the default classification and the one most appropriate for products or funds with no ESG focus. Products in this class must transparently disclose and describe potential sustainability risks.

  • Article 8: Products in this class are also referred to as “Light Green”. They promote investments or projects with positive environmental or social characteristics and with principles of good corporate governance. They must integrate and declare sustainable risks and must comply with the "do no significant harm" principle.

  • Article 9: Products in this class are also referred to as “Dark Green” and pursue either a sustainable investment objective or a reduction in carbon emissions. They must demonstrate that none of the six objectives of the EU taxonomy are compromised and actively contribute to at least one of them.

EU Taxonomy

This is a classification system to provide companies, investors, and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. In this way, it is intended to create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.

The EU Taxonomy establishes six environmental objectives:

  1. Climate change mitigation

  2. Climate change adaptation

  3. The sustainable use and protection of water and marine resources

  4. The transition to a circular economy

  5. Pollution prevention and control

  6. The protection and restoration of biodiversity and ecosystems

 

Application of SFDR & EU Taxonomy to Crypto

As an issuer of ESG ratings based in Europe, GCR is committed to incorporating the regulatory framework into our assessment of crypto assets. Accordingly, with our latest rating update in January 2023, we are giving greater weight to the transparency and quality of the data analyzed in our ratings.


In addition, GCR assesses each blockchain against Articles 6, 8, and 9 of the SFDR framework, as well as the EU taxonomy objectives, where applicable. Tokens are not assessed against these rules as they are built on existing blockchains. Read more about the distinction between native coins and tokens here. Currently, we do not assess whether a blockchain complies with MiFID II guidelines.


The evaluations for regulatory compliance according to the SFDR articles as well as information on complying with the EU taxonomy is currently only available to our customers via API.


GCR is the first organization is to analyze and evaluate crypto assets according to ESG criteria. There is not yet a standard for dealing with the aforementioned regulations. By sharing our assessment methodology for SFDR and the EU taxonomy, we aim to show that crypto assets can be fully compliant with regulation - you just need to know which ones.


Examples of selected blockchains

Crypto Asset

ESG Rating

​SFDR Art. 6

SFDR Art. 8

SFDR Art. 9

EU Taxonomy

D

✔️

B

✔️

✔️

✔️

C

✔️

B

✔️

✔️

C

✔️

✔️

✔️

A

✔️

✔️

✔️

A

✔️

✔️

✔️

C

✔️

B

✔️

✔️

B

✔️

 

[1] For more information, see https://www.eurosif.org/policies/sfdr

[2] Descriptions based on the draft regulatory technical standard published by the European Supervisory Authorities ("ESAs") on February 4, 2021, and Deloitte's interpretation thereof.



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