The EU Taxonomy Regulation is an instrument providing a common classification for economic activities which can potentially contribute towards meeting of one of the six carefully conceived environmental objectives, and therefore towards the sustainable transition.
The Taxonomy Regulation was adopted on the 18th of June 2020, and forms part of the interconnected web of legislative instruments currently designed and adopted by the EU to guide the private sector in its transition towards a sustainable future.
The EU Taxonomy is related to disclosure requirements emanating from three different legislative instruments:
Investors' 'sustainability preferences' stemming from Directive 2014/65/EU on markets in financial instruments ('MiFID II), adopted by the Commission in April 2021. This goes beyond the scope of our services;
The Sustainable Finance Disclosure Regulation (the 'SFDR'), whose Level 1 disclosure-related requirements came into force on the 10th of March 2021, and subsequent Level 2 disclosure requirements are to come into force on 1 January 2023; and
Directive 2013/34/EU, better known as the Non Financial Reporting Directive (the 'NFRD'), which will be replaced by the Corporate Sustainability Reporting Directive (the 'CSRD').
Non-Financial Undertakings
This substitution of the NFRD by the CSRD is projected to occur only by January 2025, where companies already in-scope for the NFRD will be required to report for the reference period of the preceding year.
In the meantime, Article 8(1) of The Taxonomy Regulation sets the scope for non-financial (and certain categories of financial) undertakings that need to report on their Taxonomy. Article 10 of Delegated Regulation 2021/2178 determines that such entities must report on their Taxonomy-eligibility and -alignment.
Companies currently obliged to comply with the NFRD must publish information on the manner and extent to which their economic activities are associated with activities considered 'environmentally sustainable' as defined in Articles 3 and 9 of the Taxonomy Regulation.
In particular, they must publish the proportion of their turnover generated from the provision of products or services which are related to activities considered 'environmentally sustainable', as well as the proportion of their capital expenditure and operating expenditure related to those activities.
Financial Undertakings
The second type of entities that need to report on the Taxonomy is related to the SFDR. The latter legislation requires transparency from financial undertakings with regards to to financial products with environmental considerations.
Article 5 of the Taxonomy Regulation relates to 'environmentally sustainable investments' as defined in Article 9 SFDR. Financial investors must specify the proportion of investments made in environmentally sustainable economic activities from all investments of the financial product, which includes the proportion of enabling and transitional activities.
Article 6 of the Regulation lays down reporting requirements for 'products promoting environmental characteristics' as defined in Article 8 SFDR. Financial investors must specify the same information as that required by environmentally sustainable investments (explained above). Article 8 products which promote social characteristics thus fall outside the scope for reporting Taxonomy alignment.
In Recital (36) of the SFDR's Delegated Regulation, the Commission clarifies that financial market participants (FMPs) have the choice of calculating the key performance indicator either as proportion of turnover, capital expenditure or operating expenditure. To ensure comparability among products, The Commission sets turnover as default (codified in Article 17(3)), but clarifies that capital and operating expenditure should be used where the metric is more representative for the degree to which the products invest in environmentally sustainable activities, and requires an explanation for such better suitability (which is also present as option in Article 17(4)).
The ESA's Clarifications on the ESAs’ draft RTS under SFDR, published on June 2nd 2022, further clarifies the Taxonomy-related disclosures for financial products. With regards to investments with a climate change adaptation objective, pre-contractual Taxonomy-alignment disclosures can be presented as turnover, but, where more appropriate, can resort to capital and operating expenditures, provided they give an explanation for such use.
For periodic disclosures (both for climate change mitigation and adaptation), Taxonomy-alignment should be represented as a bar chart, composed of turnover, capital expenditure and operating expenditure. A further breakdown of the proportion of each of the environmental objectives to which the investment contributes is required to be disclosed in such periodic reporting.
Eligibility
Finally, with regards to EU Taxonomy Eligibility, only companies which are in-scope stemming from Article 8 of the Taxonomy (NFRD in-scope companies) are required to disclose their proportion of eligible activities.
Financial market participants, on the other side, whose compliance stems from the SFDR only, have to report on Taxonomy-alignment, and therefore do not have to determine their Eligibility.
For both financial and non-financial undertakings complying with the NFRD, this requirement began on the 1st of January 2022, prior to the starting date to report on Alignment.
Eligibility provides an indication that a company generates monetary capital through an activity that can be evaluated through the Taxonomy. The data point will provide larger value than the alignment reported a year later.
To provide with a better overview of the different Taxonomy-related disclosures and procedural aspects surrounding such reporting, we have summarised the topics discusses above in the following Tables:
Table 1: Overview of Taxonomy alignment and eligibility requirements for the different legal entities
Table 2: Type of Taxonomy-alignment representation needed according to type of disclosure document