EU Taxonomy: How to Solve for Sovereign Bonds

Regulatory Compliance April 4, 2022

The EU Taxonomy Regulation is an essential component of the European Commission’s action plan to reorient capital flows towards a more environmentally sustainable economy, and it provides all stakeholders with a classification system to determine which investments are environmentally sustainable. 

The draft Regulatory Technical Standards (RTS) report further details Articles 4, 5 and 6 of the Taxonomy Regulation by providing template pre-contractual and periodic product disclosures for financial market participants (e.g., asset managers, credit institutions, etc.). Within these templates, among many other key performance indicators (KPIs), the financial market participant is required to disclose the products’ total Taxonomy alignment including and excluding sovereign bonds from the denominator

This requirement is meant to even the comparison between financial products that contain sovereign bonds which are not included in the Taxonomy. For example, a portfolio containing investments in multiple sovereign bonds will have lower eligibility and alignment but a portfolio that has only equity investments will appear more aligned. However, by displaying 2 KPI – including and excluding sovereign bonds – investors can have increased transparency and a more apples-to-apples basis for comparing financial products. 

To facilitate this analysis, Clarity AI has introduced functionality that recalculates the total portfolio with and without sovereign bonds in milliseconds with just one click.

With the Sovereign Bonds filter on:

Without the Sovereign Bonds filter on:

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