Taxonomy Regulation – FAQs on Article 8 Disclosure Obligation

Summary

On 20 December 2021, the Commission published a set of FAQs entitled “How should financial and non-financial undertakings report Taxonomy-eligible economic activities and assets in accordance with the Taxonomy Regulation Article 8 Article 8 Delegated Act?”. The FAQs are designed to assist entities in making disclosures under Article 8 of the Taxonomy Regulation.

Background

In addition to setting out harmonised criteria for determining whether an eligible economic activity qualifies as environmentally sustainable, the Taxonomy Regulation is also a transparency tool.

In particular, Article 8 of the Taxonomy Regulation imposes a disclosure obligation (the Article 8 disclosure obligation) for entities which are already required to include a non-financial statement in their management report under the Non-Financial Reporting Directive (In-scope Entities).

The Article 8 disclosure obligation:

• requires In-scope Entities to include information on how and to what extent their activities are associated with taxonomy-aligned economic activities in their non-financial statements or consolidated non-financial statements; and
• applies to both financial undertakings (ie, asset managers, credit institutions, investment firms, insurance undertakings or reinsurance undertakings) and non-financial undertakings that qualify as In-scope Entities.

Although Article 8(2) of the Taxonomy Regulation requires non-financial undertakings to disclose information on the proportion of the turnover, capital expenditure and operating expenditure of their activities related to assets or processes associated with environmentally sustainable economic activities, it does not specify equivalent KPIs for financial undertakings.

The details of the key performance indicators or KPIs to be used by In-scope entities were recently set out in a delegated act (the Article 8 Delegated Act, which we summarised here). The FAQs serve to provide further assistance to in-scope entities.

Accompanying Documents

The FAQs are accompanied by two documents prepared by the Platform on Sustainable Finance:

• An Appendix to the FAQs entitled “Platform considerations on voluntary information as part of Taxonomy-eligibility reporting”, which although not an official Commission document provides supplementary information to help those who are making disclosures under Article 8. The Appendix deals primarily with voluntary reporting which should:
  • not contradict or misrepresent the mandatory information disclosed under Article 8;
  • not be given more prominence than the mandatory disclosures; and
  • be accompanied with information on the basis used for its preparation and a clear explanation on how it differs from mandatory reporting; and
• an EU taxonomy NACE alternate classification mapping, which contains an indicative mapping of selected industry classification systems (for example the Refinitiv Business Classification (TRBC) and the Bloomberg Industry Classification Standard (BICS)), and how they relate to the description of economic activities in the EU Taxonomy.

The FAQs

The FAQs contain 22 questions on the Article 8 disclosure obligation some of which we have summarised below.

In scope Entities are encouraged to use the templates from the Article 8 Delegated Act for their eligibility reporting, in order to improve comparability.

Question
Question 5 of the FAQs is: “Should financial and non-financial undertakings use the Annexes provided in the Disclosure Delegated Act to report their eligibility disclosures?”

Summary
The Article 8 Delegated Act does not require the use of the reporting templates for eligibility reporting, except for the reporting of qualitative information.

However, the FAQs suggest that financial undertakings voluntarily use the Article 8 Delegated Act’s templates, in order to facilitate comparability between eligibility and alignment reporting and between reporting across undertakings.

The templates should be used “to the extent possible, to guide eligibility-related disclosures in their first years of eligibility-reporting (ie in 2022 for non-financial undertakings, and 2022 and 2023 for financial undertakings)”.

This suggestion is further developed in the Appendix, for example from a credit institution’s perspective, the section “How can I use Annex VI for my eligibility reporting requirement?” recommends that banks “may build, on a voluntary basis, on the formats provided in the Annexes of the disclosures Delegated Act to prepare their Taxonomy-eligibility reporting”.

The Appendix also sets out three options for dealing with the fact that although the Taxonomy requires credit institutions to report their alignment KPIs alongside NACE codes, their counterparties will instead report economic activities. These are:

• Option 1: For those activities linked to a single NACE code in the Climate Delegated Act, report the NACE code allocated to the activity;
• Option 2: For those activities with more than one NACE code, use the lowest common NACE code;
• Option 3: For those activities with no NACE code, use the NACE code of the counterparty.

Finally Figure 6 of the Appendix sets out the cells from Annex VI and the qualitative information from Annex XI that can used by credit institutions for the eligibility reporting. We note that this suggests a single figure for “Taxonomy eligible”, as opposed to a figure for each of the first two environmental objectives.

Estimates must be reported separately from mandatory disclosures.

Question
Question 12 of the FAQs is “Can financial undertakings use estimates for Taxonomy eligibility, when information is not available from the reporting firm in 2022?”

Summary
The FAQs point out that eligibility-related reporting should be based on actual information, provided by a financial undertaking’s counterparty. Where an underlying undertaking has not yet disclosed its taxonomy eligibility, a financial undertaking may choose to estimate the proportion of eligibility of economic activities, and report it on a voluntary basis, however these estimates cannot form part of the mandatory disclosures. The Appendix contains further detailed information on voluntary reporting.

Financial counterparties should look through their investments and portfolios to report Taxonomy eligibility.

Question
Question Question 13 of the FAQs is “Should financial undertakings 'look through' their investments and portfolios to report Taxonomy eligibility?”

Summary
The FAQs state that financial undertakings should look through their portfolios of investments and assets to assess those investee undertakings that are the ultimate beneficiary and their taxonomy aligned activities for the purpose of the disclosures required by the Article 8 Delegated Act.

Taxonomy-eligible SME debt financing a specific identified activity may be included in eligibility reporting.

Question
Question 21 of the FAQs is “Can green SME debt that is taxonomy aligned be reported as eligible?”

Summary
This question deals with the issue that, while the Article 8 Delegated Act provides that exposures to non-NFRD entities are excluded from the numerator but included in the denominator of Taxonomy reporting of financial undertakings, it also provides that:

‘without prejudice to paragraph 1, environmentally sustainable bonds or debt securities with the purpose of financing specific identified activities that are issued by an investee undertaking shall be included in the numerator of key performance indicators up to the full value of Taxonomy-aligned economic activities that the proceeds of those bonds and debt securities finance, on the basis of information provided by the investee undertaking.’

Therefore, financial undertakings should include the proportion of Taxonomy-eligibility of the proceeds of those environmentally sustainable bonds and debt securities whose purpose is to finance specific identified activities, as part of the numerator of the eligibility disclosure.

Debt securities in this context include SME use of proceeds bonds as opposed to loans, in line with FINREP. The FAQs note that the scope of this exclusion from the numerator of the KPI is subject to a review by 2024 and that the adoption and entry into force of the CSRD should enlarge the scope of reporting to listed SMEs. Exposures to SMEs may also be reported on a voluntary basis, in line with the Appendix.

Conclusion

The FAQs, Appendix and classification mapping provide valuable additional information to In-scope entities preparing for next year’s eligibility reporting. We are closely monitoring the development of the Taxonomy regime.