FINAL REPORT ON TAXONOMY-RELATED PRODUCT DISCLOSURE RTS published by joint committee on sustainable finance[1]

On 22 October 2021, the Joint Committee on sustainable finance issued its final report on taxonomy-related product disclosures. The report contains in particular draft regulatory technical standards (draft RTS) for the various disclosure obligations mandated by the SFDR and the Taxonomy Regulation. The final report covers the content and presentation of these disclosures pursuant to Article 8(4), 9(6) and 11(5) of Regulation (EU) 2019/2088 (SFDR). These articles were inserted in the SFDR through Article 25 of Regulation (EU) 2020/852 (the “Taxonomy Regulation” or the “TR”) which amends the SFDR, thereby establishing a direct link between the SFDR and the Taxonomy Regulation. The draft RTS contain templates for pre-contractual and periodic product disclosures, thus creating a single set of rules for disclosure obligations under the SFDR/Taxonomy Regulation.

The published draft RTS provide guidance and define content and presentation requirements for the following areas:

• According to Article 8(4) SFDR: Development of additional pre-contractual disclosures relating to the content and presentation of Article 8 SFDR products subject to Article 6 TR, concerning climate objectives and other environmental objectives under Article 9 TR respectively.
• According to Article 9(6) SFDR: Development of additional pre-contractual disclosures relating to the content and presentation of Article 9 SFDR products subject to Article 5 TR, relating to disclosures concerning climate objectives and other environmental objectives under Article 9 TR respectively.
• According to Article 11(5) SFDR: Development of additional rules on the content and presentation of information required under Article 5 and 6 TR for periodic disclosures relating to climate objectives and other environmental objectives under Article 9 TR respectively.

The draft RTS cover in detail the content and presentation of additional information to the SFDR product disclosures where the product makes sustainable investments contributing to environmental objectives as defined by the SFDR and Taxonomy-Regulation. The taxonomy-related product RTS provide amended templates with additional specific taxonomy-related disclosure requirements. The draft RTS require (i) an identification of which environmental objectives the economic activities funded by the product contribute to and (ii) substantial and detailed disclosures on “how and to what extent” the economic activities the product[2] invests in qualify as environmentally sustainable within the meaning of the Taxonomy-Regulation. Amongst other requirements, the draft RTS require disclosure of whether the environmentally sustainable economic activities have been/will be subject to an assessment by an auditor or a third party, and if so, the name of that auditor or third party.

Article 5(a) of the Taxonomy Regulation requires that the disclosures as determined by the draft RTS include information on the environmental objective(s) set out in Article 9 of the Taxonomy Regulation that the investment of the product contributes to. Article 9 of the Taxonomy Regulation defines as 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

The draft RTS propose that Article 9 SFDR products with an environmental objective should be treated as a subset of a larger Article 9 SFDR category, and Article 8 SFDR products which make sustainable investments with an environmental objective as a subset of a larger Article 8 SFDR category of products which make sustainable investments.

The extent to which investments are taxonomy-aligned

For Article 9 SFDR products, the Joint Committee suggests that the pre-contractual transparency requirement is inserted into the description of the sustainable investment objective in the SFDR RTS and the corresponding periodic disclosure description. For Article 8 SFDR products, the Joint Committee proposes for pre-contractual Article 6 Taxonomy Regulation product disclosures, to require the disclosure of the relevant environmental objectives set out in Article 9 of the Taxonomy Regulation. With regard to an alignment of the SFDR and Taxonomy Regulation, the report proposes disclosures to include information on “how and to what extent” the economic activities the product invests in qualify as environmentally sustainable under the Taxonomy Regulation. Pre-contractually as well as periodically, the “extent” to which the economic activities to be invested in qualify as environmentally sustainable is to be disclosed within the disclosure on asset allocation as required by the SFDR. The draft RTS require a graphical representation of key performance indicators (KPIs)[3]. These KPIs should be calculated based on the taxonomy-compliant activities funded by the investments of the financial product, e.g. the alternative investment fund in question. Financial market participants will be required to disclose, for pre-contractual disclosures, one KPI of choice for all non-financial undertaking investee companies the product invests in and explain the reasons for that choice, including how that choice is appropriate for the investors and applying the same approach to all investments made by that given financial product.

How the investments are taxonomy-aligned

In order to achieve transparency as to how the investments are taxonomy-aligned, the final report proposes to include an indication of whether the environmentally sustainable economic activities have been subject to an assurance provided by an auditor or a review by a third party, and if so, the name of that auditor or third party, and for pre-contractual disclosures, whether it will be subject to assessment by auditors or third parties.

The report also provides templates for the required pre-contractual as well as periodic disclosure obligations for the products mentioned above. The requirements described above do not – as of now –apply to social objectives pursued by a product as the taxonomy does not yet cover those objectives.

[1] Final report on taxonomy-related product disclosure RTS (europa.eu)

[2] A “product” within the meaning of the SFRD and Taxonomy Regulation includes inter alia alternative investment funds as well as UCITS.

[3] This obligation only applies to large companies. Small companies may voluntarily decide to publish such KPIs. KPIs relate inter alia to information on the proportion of the turnover, capital expenditure (CapEx) or operating expenditure (OpEx) of large non-financial companies that is associated with environmentally sustainable economic activities.

FINAL REPORT ON TAXONOMY-RELATED PRODUCT DISCLOSURE RTS published by joint committee on sustainable finance[1]

On 22 October 2021, the Joint Committee on sustainable finance issued its final report on taxonomy-related product disclosures. The report contains in particular draft regulatory technical standards (draft RTS) for the various disclosure obligations mandated by the SFDR and the Taxonomy Regulation. The final report covers the content and presentation of these disclosures pursuant to Article 8(4), 9(6) and 11(5) of Regulation (EU) 2019/2088 (SFDR). These articles were inserted in the SFDR through Article 25 of Regulation (EU) 2020/852 (the “Taxonomy Regulation” or the “TR”) which amends the SFDR, thereby establishing a direct link between the SFDR and the Taxonomy Regulation. The draft RTS contain templates for pre-contractual and periodic product disclosures, thus creating a single set of rules for disclosure obligations under the SFDR/Taxonomy Regulation.

The published draft RTS provide guidance and define content and presentation requirements for the following areas:

• According to Article 8(4) SFDR: Development of additional pre-contractual disclosures relating to the content and presentation of Article 8 SFDR products subject to Article 6 TR, concerning climate objectives and other environmental objectives under Article 9 TR respectively.
• According to Article 9(6) SFDR: Development of additional pre-contractual disclosures relating to the content and presentation of Article 9 SFDR products subject to Article 5 TR, relating to disclosures concerning climate objectives and other environmental objectives under Article 9 TR respectively.
• According to Article 11(5) SFDR: Development of additional rules on the content and presentation of information required under Article 5 and 6 TR for periodic disclosures relating to climate objectives and other environmental objectives under Article 9 TR respectively.

The draft RTS cover in detail the content and presentation of additional information to the SFDR product disclosures where the product makes sustainable investments contributing to environmental objectives as defined by the SFDR and Taxonomy-Regulation. The taxonomy-related product RTS provide amended templates with additional specific taxonomy-related disclosure requirements. The draft RTS require (i) an identification of which environmental objectives the economic activities funded by the product contribute to and (ii) substantial and detailed disclosures on “how and to what extent” the economic activities the product[2] invests in qualify as environmentally sustainable within the meaning of the Taxonomy-Regulation. Amongst other requirements, the draft RTS require disclosure of whether the environmentally sustainable economic activities have been/will be subject to an assessment by an auditor or a third party, and if so, the name of that auditor or third party.

Article 5(a) of the Taxonomy Regulation requires that the disclosures as determined by the draft RTS include information on the environmental objective(s) set out in Article 9 of the Taxonomy Regulation that the investment of the product contributes to. Article 9 of the Taxonomy Regulation defines as 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

The draft RTS propose that Article 9 SFDR products with an environmental objective should be treated as a subset of a larger Article 9 SFDR category, and Article 8 SFDR products which make sustainable investments with an environmental objective as a subset of a larger Article 8 SFDR category of products which make sustainable investments.

The extent to which investments are taxonomy-aligned

For Article 9 SFDR products, the Joint Committee suggests that the pre-contractual transparency requirement is inserted into the description of the sustainable investment objective in the SFDR RTS and the corresponding periodic disclosure description. For Article 8 SFDR products, the Joint Committee proposes for pre-contractual Article 6 Taxonomy Regulation product disclosures, to require the disclosure of the relevant environmental objectives set out in Article 9 of the Taxonomy Regulation. With regard to an alignment of the SFDR and Taxonomy Regulation, the report proposes disclosures to include information on “how and to what extent” the economic activities the product invests in qualify as environmentally sustainable under the Taxonomy Regulation. Pre-contractually as well as periodically, the “extent” to which the economic activities to be invested in qualify as environmentally sustainable is to be disclosed within the disclosure on asset allocation as required by the SFDR. The draft RTS require a graphical representation of key performance indicators (KPIs)[3]. These KPIs should be calculated based on the taxonomy-compliant activities funded by the investments of the financial product, e.g. the alternative investment fund in question. Financial market participants will be required to disclose, for pre-contractual disclosures, one KPI of choice for all non-financial undertaking investee companies the product invests in and explain the reasons for that choice, including how that choice is appropriate for the investors and applying the same approach to all investments made by that given financial product.

How the investments are taxonomy-aligned

In order to achieve transparency as to how the investments are taxonomy-aligned, the final report proposes to include an indication of whether the environmentally sustainable economic activities have been subject to an assurance provided by an auditor or a review by a third party, and if so, the name of that auditor or third party, and for pre-contractual disclosures, whether it will be subject to assessment by auditors or third parties.

The report also provides templates for the required pre-contractual as well as periodic disclosure obligations for the products mentioned above. The requirements described above do not – as of now –apply to social objectives pursued by a product as the taxonomy does not yet cover those objectives.

[1] Final report on taxonomy-related product disclosure RTS (europa.eu)

[2] A “product” within the meaning of the SFRD and Taxonomy Regulation includes inter alia alternative investment funds as well as UCITS.

[3] This obligation only applies to large companies. Small companies may voluntarily decide to publish such KPIs. KPIs relate inter alia to information on the proportion of the turnover, capital expenditure (CapEx) or operating expenditure (OpEx) of large non-financial companies that is associated with environmentally sustainable economic activities.