EC: Supplementing Article 8 of the Taxonomy Regulation

On 6 July 2021, the European Commission adopted the Delegated Act (the “DA”) supplementing Article 8 of the Taxonomy Regulation for review by the European Parliament and Council. The Delegated Act provides for specific details on the content and presentation of information that both financial and non-financial undertakings are required to disclose in accordance with the Taxonomy Regulation.[1]

Redirecting capital flows toward sustainable investment and ensuring market transparency are among the main goals of the European Commission’s action plan on financing sustainable growth. To achieve such goals, in June 2020, the Commission introduced the EU classification system for sustainable activities, namely the EU taxonomy.The Taxonomy Regulation serves as the basic EU legislative measure for redirecting economic activities toward sustainability. It defines which operations fall under the scope of environmentally sustainable economic activities and sets out the minimum criteria for economic activities to qualify as environmentally sustainable.

The regulation identifies the following environmental objectives:

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

Furthermore, for an activity to be considered environmentally sustainable, all the following criteria should be met:

• It contributes substantially to one of the above-mentioned environmental objectives.
• It does not cause any significant harm to any of these environmental objectives.
• It is carried out in compliance with minimum safeguards.
• It complies with certain technical screening criteria.

According to the Taxonomy Regulation, financial and non-financial undertakings covered by the Non-Financial Reporting Directive (NFRD[2]), and financial market participants covered by the Sustainable Finance Disclosure Regulation (SFDR[3]) are required to disclose information on how and to what extent their economic activities are linked to environmentally sustainable activities. To perform this assessment, Article 8 of the Regulation identifies three Key Performance Indicators (KPIs) as relevant for non-financial undertakings, namely their turnover, their capital expenditure, and their operating expenditure. However, it fails to identify equivalent KPIs for financial undertakings, such as credit institutions, asset managers, investment firms, and insurance and reinsurance undertakings.

DA’s Impact on Financial Undertakings

As a result, the Delegated Act provides for specific KPIs to assess the proportion of environmentally sustainable economic activities for financial undertakings. Moreover, it lays down the methodology for calculating the respective KPIs and gives further details on the content and presentation of information to be disclosed for all undertakings.

By asking companies to disclose specific information on their environmental performance, the DA aims to ensure more transparency and to prevent “greenwashing” in the market. Therefore, it will enable investors and the public to assess a company’s alignment with the Taxonomy Regulation. Such disclosure requirements will also assist companies in obtaining funding for their sustainable projects.

KPIs for Non-Financial Undertakings

Non-financial undertakings should provide a breakdown of the three KPIs based on the economic activity pursued, including transitional and enabling activities, and the environmental objective reached.

In addition, non-financial undertakings must also include accompanying qualitative information about the calculation and key elements for change of the three KPIs during the reporting period.

KPIs for Financial Undertakings

The main KPIs for financial undertakings concern the proportion of taxonomy-aligned economic activities in their financial activities (i.e. lending, investment and insurance). For instance, for credit institutions, the DA identifies a main KPI for on-balance sheet assets related to financing activities, KPIs for off-balance sheet assets, and a KPI for commissions and fees related to other non-financing activities.

For investment firms, the DA identifies a KPI for their core investments and activities dealing on own account and a KPI for those services and activities not dealing on own account.

For asset managers, the KPI is defined based on the proportion of taxonomy-aligned investments managed by an asset manager in the value of all covered assets under management from both its collective and individual portfolio management activities (Green Investment Ratio).

To calculate their own Green Investment Ratio, asset managers will use the KPIs of the underlying investee companies. Asset managers must also provide for a breakdown for each environmental objective and for aggregated environmentally sustainable economic activities, a subset of transitional and enabling economic activities, as well as the type of investment.

Insurers and reinsurers must disclose the KPIs related to their investments and underwriting activities. The first KPI relates to the investment policy of insurers and reinsurers. The second one relates directly to their underwriting activity. The KPI related to investments must be calculated as the proportion of the investments of insurance or reinsurance undertakings that are associated with taxonomy-aligned economic activities in relation to their investments. Whereas the KPI related to underwriting activities must be calculated as the proportion of the ‘non-life gross premiums written’ corresponding to taxonomy-aligned insurance activities as defined in the Climate Delegated Act[4] in relation to total non-life gross premiums written.

Timeframe for Disclosure Requirements

The Delegated Act sets out that as of 1 January 2022 only certain qualitative information must be disclosed.

As of 1 January 2023, the Delegated Act will fully apply to non-financial undertakings and as of 1 January 2024 to financial undertakings, bearing in mind that, for instance, asset managers rely on the data of the underlying investee companies.

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[1] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088.

[2] Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups.

[3] 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.

[4] Commission Delegated Regulation (EU) …/… supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives (C/2021/2800 final).