The European Commission has released a draft delegated regulation on Article 8 Taxonomy reporting for entities subject to the Non-Financial Reporting Directive. Large EU entities required to publish non-financial information, whether in the financial services sector or not, will want to take note of the practical requirements laid down in the draft Regulation. With the expected broadening of scope of the Non-Financial Reporting Directive, a significantly larger number of organisations will be impacted by the Taxonomy reporting requirements over the longer term.
The draft regulation follows on from the release of advice from the three European Supervisory Agencies ("ESAs"), being ESMA, the EBA and EIOPA on the content, methodology and presentation of the information required by Article 8 (see our earlier update on ESMA's advice).
As noted in our previous update, Article 8 of the Taxonomy regulation specifies that non-financial undertakings will need to report on Taxonomy-aligned turnover, capital expenditure and operating expenditure, but there was no equivalent specification for financial undertakings. The draft regulation plugs this gap by including specifications on reporting requirements for financial undertakings, largely following the ESAs' advice. It introduces a "green asset ratio" for banks – the proportion of total assets invested in taxonomy-aligned economic activities as a share of total covered assets - and what the Commission FAQ calls a "green investment ratio" for asset managers – the proportion of taxonomy-aligned investments managed by an investment manager compared with the value of all covered assets in its collective and individual portfolio management activities. Financial undertakings making disclosures need not include exposures and investments in undertakings that are not subject to non-financial reporting information requirements (SME and non-EU exposures) until 1 January 2025.
For non-financial companies, in simple terms, full disclosures must include percentage based KPIs for turnover, CapEx and OpEx, calculated by dividing a numerator by a denominator as follows:
The draft regulation determines what can be taken into account in calculating the denominator, in line with international and national accounting standards. The requirement to include turnover, CapEx and OpEx KPIs applies from 1 January 2023. As mentioned in our previous update, the reporting requirements should be read in the context of the Commission's proposals to significantly expand the scope of the Non-Financial Reporting Directive, or, as it will become, the Corporate Sustainability Reporting Directive (see our update). This Directive proposes to bring into scope an additional 40,000 or so EU entities. Regulators hope that that the proposal will make swift progress through the EU law-making institutions in order for the first reports under the revised Directive to be made in 2023 or 2024.
It is not yet clear whether the newly-in-scope companies will be immediately subject to the full Taxonomy reporting requirements including full KPIs, or could also benefit from a transitional period.
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