ESG – New Taxonomy FAQs Published by the Commission

Introduction

On 19 December 2022, the European Commission published two draft notices containing frequently asked questions (FAQs) to aid in the interpretation and implementation of certain legal provisions under Taxonomy legislation.

Background

The Taxonomy Regulation is a transparency tool that sets out harmonised criteria for determining whether an eligible economic activity qualifies as environmentally sustainable. The Taxonomy regulation also includes a disclosure obligation at Article 8 (the Article 8 disclosure obligation), which applies to 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. Article 8 also 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.

The details of the key performance indicators or KPIs to be used by In-scope Entities are set out in a delegated act (the Article 8 Delegated Act, which we summarised here).

The TSC Notices

The first notice (the TSC Notice) sets out responses to FAQs on the technical screening criteria (TSC) for the Taxonomy’s first two environmental objectives of climate change mitigation and climate change adaptation. These TSC were set out in the Climate Delegated Act, which has applied since 1 January 2022.

The TSC Notice contains FAQs on:

• Horizontal Questions on the interpretation of the TSC generally, and which are not limited to a particular economic activity;
• Sector Specific Questions on the TSC on the interpretation of TSC for specific economic activities, within sectors including forestry, energy and construction; and
• Questions on recurring DNSH criteria on the interpretation of the “do no significant harm” test.

The second notice (the Disclosures Notice) sets out responses to FAQs on the Article 8 disclosure obligation, the details of which are set out in the Disclosures Delegated Act. The Disclosures Notice supplements the existing guidance on the Disclosures Delegated Act:

• The FAQs on ‘What is the EU Taxonomy Article 8 delegated act and how will it work in practice?’;
• The FAQs on how financial and non-financial undertakings should report their Taxonomy-eligible economic activities and assets in accordance with the Disclosures Delegated Act; and
• A Commission Notice on the interpretation of certain legal provisions of the Disclosures Delegated Act.

The Disclosures Notice has been published shortly before Non-financial undertakings are due to begin reporting their KPIs on Taxonomy alignment, and therefore much of the notice is concerned with the Turnover, Capex and OpEx KPIs which these undertakings will use. The Commission states that it may publish further notice on the Green Asset Ratio (GAR) and the Green Investment Ratio (GIR) which Financial Undertakings will begin reporting as of 1 January 2024.

Disclosures Notice

The Disclosures Notice contains 34 FAQs, divided between general FAQs, and FAQs specific to the Turnover, CapEx and OpEx KPIs. We have set out below a summary of certain of these FAQs below:

What is the timeline for the Complementary Delegated Act?

The Complementary Delegated Act amended the Disclosures Delegated Act and the Climate Delegated Act, to introduce specific nuclear energy and fossil gas related economic activities into the EU Taxonomy. On the basis that these amendments become effective from 1 January 2023, non-financial undertakings should disclose the eligibility, non-eligibility, and alignment of these activities as of that date, in relation to the 2022 financial year. Financial undertakings will only be required to report the eligibility of such activities until 31 December 2023, with alignment following in 2024.

What is the timeline for the remaining four environmental objectives?

So far, there have been no TSC for the four environmental objectives of (i) sustainable use and protection of water and marine resources; (ii) transition to a circular economy; (iii) pollution prevention and control; and (iv) protection and restoration of biodiversity and ecosystems, which were due to become effective on 1 January 2023. On the basis that disclosure is dependant on the existence of the TSC, reporting in relation to these four objectives, they will not be in scope for reporting in 2023.

What impact will the CSRD have on the scope of the reporting entities under the Disclosures Delegated Act?

The phased implementation of the CSRD has raised some questions about the timing of the expansion of the entities in scope of reporting under the Taxonomy, since the Taxonomy population is defined by reference to the Accounting Directive, and in particular by those provisions which were introduced by the NFRD and which will be replaced by the CSRD. The Disclosures Notice sets out a useful timeline, as follows:

• financial years starting from 1 January 2024 (publication from 2025) – the scope remains as under the NFRD;
• financial years starting from 1 January 2025 (publication in 2026) - large undertakings and parent undertakings of a large group – ie the public interest entity and 500 employee criteria will fall away;
• financial years starting from 1 January 2026 (publication in 2027):
  • listed SMEs excluding micro-undertakings;
  • small non-complex institutions; and
  • captive reinsurance undertakings.
• financial years starting from 1 January 2028 (publication in 2029) - third-country undertakings with significant operations in the EU.

How can entities ensure that voluntary reporting does not contradict or misrepresent mandatory disclosures?

The Disclosures Notice notes that voluntary reporting can include both (i) entities subject to eligibility reporting disclosing their anticipated alignment; and (ii) reporting by entities not subject to any obligation under the Taxonomy. Both entities are advised to disclose the basis on which the voluntary disclosures have been prepared, and entities who are disclosing both mandatory and voluntary information should make clear how the two differ, as well as ensuring that the voluntary information is not given more prominence, and that it does not contradict or misrepresent the mandatory information.

Conclusion

Both notices provide important clarifications on the timing and requirements of reporting under the Taxonomy Regulation, which will be useful for financial and especially non-financial undertakings preparing for reporting in 2023. We will be preparing a more detailed summary of the FAQs in the coming days.