Taxonomy Regulation: Additional sustainability disclosures for firms

Under the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation, where a financial product promotes environmental characteristics (in the case of a product falling within Article 8 SFDR) or invests in an economic activity that contributes to an environmental objective (in the case of a product falling within Article 9 SFDR), additional disclosures based on the Taxonomy Regulation must be made in pre-contractual information and periodic reports.

The disclosures based on the Taxonomy Regulation are in respect of the following environmental objectives: climate change mitigation; climate change adaptation;  the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control and the protection and restoration of biodiversity and ecosystems.

Very broadly, the proposed Regulatory Technical Standards (RTS) in the consultation amend the draft Commission Delegated Regulation on the content, methodologies and presentation of disclosures (including the mandatory templates) under SFDR (SFDR Delegated Regulation).  We discussed the SFDR Delegated Regulation in our briefing in February 2021.  The RTS expand the disclosures required to reflect the provisions of the Taxonomy Regulation.  There has also been some minor reworking of parts of the SFDR Delegated Regulation. 

If adopted, the requirements will come into force as from 1 January 2022 in respect of climate change mitigation and climate change adaptation and 1 January 2023 in respect of the remaining environmental objectives.

Annexes II to V of the SFDR Delegated Regulation are also replaced with new updated Annexes which include new provisions to be included in the pre-contractual disclosures and periodic reports to reflect the additional information required under the RTS.

The consultation closes on 12 May 2021 with a final report with draft RTS expected by late June or early July 2021.

The additional Taxonomy-related pre-contractual disclosures include:

• Information on the objectives to which the sustainable investments contribute and how they do not cause significant harm.
• The environmental objectives set out in the Taxonomy Regulation to which the sustainable investment underlying the financial product contributes.
• A graphical representation in the form of a pie chart of the minimum taxonomy alignment of investments; where the financial product invests in economic activities that are not environmentally sustainable economic activities, a clear explanation of the reasons for doing so; and a description of the investments underlying the financial product that are in environmentally sustainable economic activities.

For the description of the taxonomy alignment of investments, this must include how equivalent information was obtained from the investee companies or third party-providers if not readily available from public disclosures.  A breakdown, expressed as a percentage, of the minimum proportion investments in activities enabling other activities to make a substantial contribution to an environmental objective or supporting a transition to a climate-neutral economy must also be included.  Where investee companies are non-financial undertakings, additional information must also be provided on how the taxonomy alignment of investments is measured and how that choice is appropriate for investors.

The draft RTS also include the methodology for calculating the taxonomy alignment of investments.  Broadly, this will be based on the market value of taxonomy-aligned investments as a proportion of the market value of all investments of the financial product.

Finally, the requirement to describe how the sustainable investments contribute to a sustainable investment objective and do not significantly harm any of the sustainable investment objectives (as originally included in the SFDR Delegated Regulation and which includes principal adverse impacts disclosures) has been amended for environmentally sustainable investments.  For such products, it is now only required to include a statement that the relevant economic activities are environmentally sustainable economic activities and whether the statement has been subject to an assurance provided by an auditor or a review by a third party (and, if so, the name of that auditor or third party).  A similar derogation also applies to website disclosures.

The additional Taxonomy-related periodic disclosures largely reflect those for pre-contractual disclosures and include: 

• Information on the objectives to which the sustainable investments contribute and how do they not cause significant harm.
• The environmental objectives set out in the Taxonomy Regulation to which the sustainable investment underlying the financial product contributed and a proportional breakdown.
• A description of the sustainable investments in environmentally sustainable economic activities during the reference period, including a graphical representation in the form of a pie chart of the taxonomy alignment of the investments and, where the financial product invests in economic activities that are not environmentally sustainable economic activities, a clear explanation of the reasons for doing so.
• A breakdown, expressed as a percentage of all investments of the financial product, of the proportion of investments in activities enabling other activities to make a substantial contribution to an environmental objective or supporting a transition to a climate-neutral economy.
• Where at least one previous periodic report has been provided for the financial product, a historical comparison of the taxonomy alignment of the investments of the reference period with previous reference periods.

Finally, the requirement to describe how the sustainable investments contribute to a sustainable investment objective and do not significantly harm any of the sustainable investment objectives is also subject to the derogation described in section 2 above.  

The flexibility on making disclosures for environmentally sustainable economic activities will be welcome for financial participants particularly given the large degree of concern around making principal adverse impact disclosures. However, the other additional disclosures will require a large degree of information gathering and analysis for financial participants.

Financial participants should also give some thought as to whether they should start considering this now, particularly for the pre-contractual disclosures should they be implemented in the manner envisaged in the consultation, given that they will need to be in a position to comply with the requirements in respect of climate change mitigation and climate change adaptation by the end of the year.

We have been following the EU's sustainability initiatives closely and have been instrumental in industry lobbying efforts.  We have considerable expertise in the new rules and their impact for firms. If you would like to discuss this further then please contact any of the persons below or your usual Travers Smith contact.