ESG – Commission publishes FAQs on Taxonomy Regulation Level 2 RTS

On 5 March 2024, the European Commission published a Commission Notice, in which it sets out FAQs on the interpretation and implementation of provisions of three Level 2 delegated acts made under the Taxonomy Regulation, namely

• the Environmental Delegated Act
• the Climate Delegated Act and
• the Disclosures Delegated Act.

The FAQs are intended to help financial undertakings implement the legislation rather than to introduce any additional requirements.

They are set out in nine sections, looking in turn at questions related to:

• general issues
• the objective of climate change mitigation (Annex I to the Climate Delegated Act)
• the objective of climate change adaptation (Annex II to the Climate Delegated Act)
• the objective of water and marine resources (Annex I to the Environmental Delegated Act)
• the objective of Transition to a circular economy (Annex II to the Environmental Delegated Act)
• the objective of pollution prevention and control (Annex III to the Environmental Delegated Act)
• the objective of biodiversity and ecosystems (Annex IV to the Environmental Delegated Act)
• the generic DNSH criteria for (among other things) climate change adaptation and
• the Disclosures Delegated Act

The Notice follows publication of the FAQs in draft form in November 2024. Our summary of the draft Notice can be found here.

As the text of the relevant FAQs has not changed, we repeat our analysis from November in respect of the following key issues.

Section I (General Questions)

• where Technical Screening Criteria (TSC) refer to specific requirements of another piece of EU environmental law, if the TSC are worded in a way that allows the use of exemptions, these exemptions are applicable, whereas if the wording does not allow the use of exemptions, those exemptions are not applicable;

• although the general rule under the Taxonomy is the references to NACE codes in TSC are indicative only and should not prevail over the specific description of an economic activity, activities in the services sector are an exception. Here, the references to NACE codes are included in the specific description of the activity, as the services relate to products manufactured by economic activities classified under specific NACE codes and, therefore, the NACE codes are not merely indicative;

• on the question of whether or not the DNSH criteria set out in the TSC are more detailed than the requirements of the European Standards for Sustainability Reporting (ESRS) which will be used for reporting under the CSRD and if the ESRS disclosures can be used to show compliance with the DNSH criteria, the FAQs clarify that compliance with the Taxonomy's DNSH criteria set out in the Taxonomy Delegated Acts is a separate issue from the thematic reporting requirements stemming from the ESRS.

  Reporting under the CSRD is intended to ensure transparency regarding the undertaking's impacts on sustainability matters, and regarding how sustainability matters affect the undertaking's development, performance and position (i.e., double materiality). The absence of specific performance thresholds under the CSRD can be compared with the Taxonomy, which requires both a significant contribution to one environmental objective as well as DNSH to any of the other five, and on this basis referring to ESRS disclosures cannot be sufficient to demonstrate compliance with the DNSH criteria, although the data used in ESRS reporting will be useful for the assessment of compliance with the DNSH criteria; and

• on the question of frequency of third party verification, the FAQs draw a distinction between the third-party assurance of Taxonomy disclosures (as required by the CSRD) and the verification of compliance with specific TSC requirements. In short, the former is required to be an annual process, whereas the frequency of the latter will be set out in the relevant TSC.

Section IX (Questions related to the Disclosures Delegated Act)

The Disclosures Delegated Act contains details of the Key Performance Indicators (KPIs) that in-scope entities should use when reporting under the Taxonomy.

Some of the questions covered by this part of the FAQs are:

• the FAQs contain a useful table setting out the timeframe for reporting under the Environmental Delegated Act and the activities added to the Climate Delegated Act. In summary this timeline will be:
  • from 1 January 2025, non-financial undertakings report their Taxonomy-alignment with the economic activities covered by the Environmental Delegated Act and the amended Climate Delegated Act;
  • from 1 January 2024 to 31 December 2025, financial undertakings report the Taxonomy-eligibility of the economic activities covered by the Environmental Delegated Act and the amended Climate Delegated Act; and
  • from 1 January 2026, financial undertakings report their Taxonomy-alignment with the economic activities covered by the Environmental Delegated Act and the amended Climate Delegated Act.
• a listed SME which opts-out of sustainability reporting until 2028 under the CSRD does not have to include Article 8 Taxonomy disclosures in its management report;
• an undertaking reporting Taxonomy disclosures for the first time in a given reporting year (N) does not need to include comparative information for the preceding financial year (N-1);
• the modified reporting templates included in the Environmental Delegated Act replace the templates in the Disclosures Delegated Act. The new templates allow reporting in relation to all six environmental objectives;
• where an activity is Taxonomy-aligned, but is eligible to contribute to more than one objective:
  • a non-financial undertaking should assess whether or not the activity is aligned with each eligible objective and report the outcome accordingly in the reporting template; and
  • there is a specific method applicable to financial undertakings for calculating KPIs per environmental objective.
• where a business combination occurs close to the year-end, meaning that it is not practically possible to assess the year-end alignment of the acquired activities, the FAQs state that undertakings should use all available information when assessing the Taxonomy-alignment of their activities, including those acquired through business combinations, in order to make accurate Taxonomy disclosures. Activities acquired through business combinations during a reporting period should be included in the reporting, based on
  • the post-acquisition Taxonomy-assessment of those acquired activities and
  • information gained during pre-acquisition due diligence.