Entities covered by the NFRD will not be required to undertake the same degree of broad and detailed reporting required under the SFDR, against principal adverse impacts of their activities, but NFRD entities will nonetheless be forced to undertake a deep investigation of their or their investee companies' activities in order to assess whether they make a substantial contribution to any of the six environmental objectives listed under the Taxonomy Regulation, to what degree and whether any of their activities cause any significant harm to any of the other Taxonomy factors.
According to Article 8, non-financial undertakings must report what proportion of their turnover, capital expenditure and operating expenditure is Taxonomy-aligned.
Annex V to the ESMA report sets out three possible reporting templates for this purpose. Covered non-financial entities will indicate what percentage of their turnover, CapEx ad OpEx is Taxonomy-aligned. All six environmental objectives must be assessed and a percentage indicated, not just those relevant for the entity. Activities may also be categorised, where relevant, as "enabling" in relation to any of the six environmental objectives or "transitional" in relation to climate change mitigation.
For turnover, the entity must disclose the proportion of eligible Taxonomy-aligned activities, eligible not Taxonomy-aligned activities, and non-eligible activities. For CapEx and OpEx, entities must disclose eligible Taxonomy-aligned activities and eligible not Taxonomy-aligned activities. When it comes to "significant harm", entities need only indicate in a yes/no manner whether or not their activities do significant harm to each of the factors.
The advice and accompanying commentary contain significant levels of detail around the calculation of turnover, operating and capital expenditure, both overall and that which counts as environmentally sustainable. Consistent with the Taxonomy generally, turnover, CapEx and OpEx may be counted as environmentally sustainable where they make a substantial contribution to one of the environmental objectives, do not significantly harm any of the other objectives, and meet the minimum safeguards. CapEx and OpEx, however, may also be considered as environmentally sustainable where it is part of a plan to make an economic activity Taxonomy-aligned over a maximum period of 5 years (with some exceptions – see below).
There will also be a significant narrative element to the reporting, despite the brevity of the reporting templates: entities will be required to explain how their KPIs were prepared, including information on the avoidance of double counting, disaggregation, assessment against the substantial contribution criteria and other matters.
From the second year, entities will be required to disclose comparative data from the previous year.
Annex VI to the ESMA report contains a reporting template specific to asset managers. These entities must give an overall percentage of Taxonomy-aligned investments, as well as a breakdown of this percentage into the six environmental objectives, in each case further broken down by transitional activities and enabling activities where relevant. There is no requirement to report investee companies' CapEx and OpEx. This reporting template in particular is deceptively simple - it is no surprise that the real challenge for companies covered by these obligations comes not from the report itself but from the underlying analysis.
ESMA acknowledges the difficulties that asset managers are likely to face in disclosing what share of their investee companies' activities are Taxonomy aligned, where many investee companies will not be in the scope of the NFRD due to their size or location, and even those which are in scope are just beginning to report their data. With this in mind, Annex VII to the advice is a methodology developed by the EU Commission's JRC, to estimate the level of Taxonomy-alignment for certain activities. The methodology first provides a more granular breakdown by NACE code of Taxonomy-covered sectors, and then provides a coefficient for each NACE code based on available evidence of the share of Taxonomy-eligible activities by sector. ESMA indicates that estimates based on the methodology may not be used by non-financial undertakings as they are expected to assess their own activities, and should be treated cautiously by financial market participants as not equivalent to company-level disclosures. The methodology does not take into account the minimum social safeguards and therefore the true number of Taxonomy-aligned businesses within a particular sector is likely to be lower than indicated by the JRC's methodology.
ESMA's advice is that the Commission adopts the methodology and that it is maintained and expanded by an independent body such as the JRC, but only for an initial period, following which its use should be phased out in favour of company-reported data. ESMA makes very clear in the consultation responses that company-disclosed data should always be favoured over methodology-based estimates.
Existing guidelines on climate-related disclosures under NFRD
The European Commission has already published non-binding Guidelines on non-financial reporting of climate-related information, back in 2019. The Guidelines suggest climate-related disclosures for each for the five reporting areas under the NFRD, such as principal risks and KPIs. For each of the five areas, a small number of recommended disclosures are given that organisations should consider using, however the guidance stresses that these will not be required for all entities and a proportionate approach should be taken. Equivalence to TCFD is noted in the guidance, where relevant.
Notably, ESMA makes only a passing reference to the Commission's Guidelines in its report and gives no indication that they should form the basis for disclosures under Article 8 of the Taxonomy Regulation.