Taxonomy-aligned economic activities under the Taxonomy Regulation mean economic activities that are described in the European Commission’s delegated acts and meet the relevant technical screening criteria (TSC).
Article 1 point 2 of Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation
‘Taxonomy-aligned economic activity’ means an economic activity that complies with the requirements laid down in Article 3 of the Taxonomy Regulation
‘Taxonomy-aligned economic activity’ means an economic activity that complies with the requirements laid down in Article 3 of the Taxonomy Regulation (see Article 1 point 2 of Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation), hence, it refers to the definition of 'environmentally sustainable economic activities'.
When it comes to terminology, investments in environmentally sustainable economic activities are investments in taxonomy-aligned activities,
Nevertheless, it is often observed that discrimination against sustainable investments outside the scope of the taxonomy (i.e. not taxonomy-aligned) should be avoided, in particular, investors should not automatically imply that sustainable investments which are not (yet) within the scope of the Taxonomy Regulation are any less sustainable.
SMSG advice to the ESA’s Joint Consultation Paper even recommends rather than use the ‘negative’ wording “investments in activities not aligned with the EU taxonomy”, to use a positive wording: “investments in activities with environmental objectives other than the EU environmental taxonomy”; “in investments with social objectives” (p. 119).
According to Article 84 of the Taxonomy Regulation, for companies (non-financial undertakings) under the scope of NFRD (and future CSDR) it will be mandatory to report the proportion of turnover associated with taxonomy-aligned activities as well as CapEx and where relevant OpEx that is aligned with the taxonomy.
“Taxonomy-aligned” means that when reporting on the percentage of turnover and CapEx compliant with the EU Taxonomy, companies bound by NFRD are also deemed to assess compliance with “do no significant harm” criteria and minimum safeguards.
In addition, non-financial companies should provide for a breakdown of the Key Performance Indicators (KPIs) based on the economic activity pursued, including:
3. environmental objective reached.
Transitory issues
European Supervisory Authorities in the above Joint Statement of 24 March 2022 also underline that the delay in the application of the Regulatory Technical Standards (RTS) has no impact on the application of the Taxonomy Regulation provisions.
Therefore, the taxonomy-alignment related product disclosures (as specified in Articles 8(2a) and 9(4a) SFDR) apply in respect of climate change mitigation and climate change adaptation from 1 January 2022 according to Article 27(2)(a) of the Taxonomy Regulation.
The supervisory expectation during the interim period before the application of the RTS is that:
- in order to comply with the provision under point (b) of the first subparagraph of Article 5 of the Taxonomy Regulation (the description of ‘to what extent’ the investments underlying the financial product are in economic activities that qualify as environmentally sustainable in Article 3 the Taxonomy Regulation), an explicit quantification should be provided through the numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy-aligned;
- information on taxonomy-eligible activities should not be provided for the disclosure of the extent to which investments underlying the financial product are in taxonomy-aligned economic activities.
Moreover, while estimates should not be used, where information is not readily available from public disclosures by investee companies, financial market participants may rely on equivalent information on taxonomy alignment obtained directly from investee companies or from third party providers.
Until the application of the RTS, the numerical disclosure referred to above could be accompanied by a qualitative clarification explaining how the financial product addresses the determination of the proportion of taxonomy-aligned investments of the financial product, for example by identifying the sources of information for that determination.
Such a clarification should be clear about the taxonomy-alignment of the investments underlying the financial product and should not disclose more information than what is required by Article 5 of the Taxonomy Regulation.
The supervisory authorities also mentioned:
“In addition to the reference to the above supervisory expectations for the sake of applying the provisions of the SFDR without the RTS during the interim period, national competent authorities are encouraged to refer financial market participants and financial advisers to the requirements set out in the draft RTS of the final reports that have been submitted to the European Commission on 4 February and 22 October 20217. The draft RTS submitted to the European Commission on 4 February and 22 October 2021 can be used as a reference for the purposes of applying the provisions of Articles 2a, 4, 8, 9, 10 and 11 of the SFDR and Article 5 and 6 of the TR in the interim period”.
KPI for the disclosure of the extent to which investments are aligned with the taxonomy
KPI for the disclosure of the extent to which investments are aligned with the taxonomy is based on the share of the taxonomy-aligned turnover, capital expenditure CapEx or operational expenditure (OpEx) of all underlying non-financial investee companies.
OpEx of underlying non-financial investee companies as one of the possible ways to calculate the KPI has met negative views of market participants.
They suggested that OpEx offers little value, introduces difficulties in the context of accounting and suffers from lack of data. OpEx is not defined in IFRS or US GAAP and this could lead to less comparable figures. In exchange, they considered turnover and CapEx disclosures as sufficient.
ESA’s Final report of 22 Pctober 2002 on taxonomy-related product disclosure RTS with regard to the content and presentation of disclosures pursuant to Article 8(4), 9(6) and 11(5) of Regulation (EU) 2019/2088, JC 2021 50, p. 37
Taxonomy-aligned activities are expressed as a share of:
- turnover reflecting the share of revenue from green activities of investee companies
- capital expenditure (CapEx) showing the green investments made by investee companies, e.g. for a transition to a green economy.
- operational expenditure (OpEx) reflecting green operational activities of investee companies.
ESA’s Final report of 22 october 2021 on taxonomy-related product disclosure RTS with regard to the content and presentation of disclosures pursuant to Article 8(4), 9(6) and 11(5) of Regulation (EU) 2019/2088, JC 2021 50
Draft Commission Delegated Regulation amending the regulatory technical standards laid down in Commission Delegated Regulation (EU) 2021/XXX as regards the content and presentation of information in relation to environmentally sustainable financial product disclosures in precontractual documents and periodic reports
Article 16b
Calculation of the taxonomy alignment of investments
1. The taxonomy alignment of investments shall be calculated in accordance with the following formula:
market value of all taxonomy-aligned investments of the financial product
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𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 𝑜𝑓 𝑡h𝑒 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡,
where ‘taxonomy-aligned investments of the financial product’ shall be the sum of the market values of the following investments of the financial product:
(a) for debt securities and equities of investee companies,where a proportion of activities of those investee companies is associated with Taxonomy-aligned economic activities, the market value of that proportion of those debt securities or equities;
(b) for debt securities other than those referred to in point (c) where a proportion of the proceeds are required by their terms to be used exclusively on Taxonomy-aligned economic activities, the market value of the proportion of those proceeds;
(c) for green bonds issued under Union legislation on environmentally sustainable bonds, the market value of those green bonds;
(d) for investments in real estate assets which qualify as Taxonomy-aligned economic activities, the market value of those investments;
(e) for investments in infrastructure assets which qualify as Taxonomy-aligned economic activities, the market value of those investments;
(f) for investments in securitisation positions with underlying exposures in Taxonomy- aligned economic activities, the market value of the proportion of those exposures; and
(g) for investments in financial products referred to in Article 5 and Article6 of Regulation (EU) 2020/852, the market value of the proportion of those financial products representing the taxonomy alignment of investments calculated in accordance with this Article.
The calculation shall be performed by applying the methodology used to calculate net short positions laid down in Article 3, paragraphs 4 and 5 of Regulation (EU) No 236/2012 of the European Parliament and of the Council.
2. For the purposes of point (a) of paragraph 1, the proportion of activities of investee companies associated with Taxonomy-aligned economic activities shall be calculated on the basis of the most appropriate key performance indicators for the investments of the financial product using the following information:
(a) for investee companies referred to in Article 8(1) and (2) of Regulation (EU)2020/852, on the basis of the disclosures made by those investee companies in accordance with that Article; and
(b) for other investee companies, on the basis of equivalent information.
3. For disclosures referred to in Articles 16a(1)(a) and 25(1)(a), in the case of investee companies that are non-financial undertakings referred to in Article 8(2) of Regulation (EU) 2020/852 and other non-financial undertakings, the calculation referred to in paragraph 2 shall use the same type of key performance indicator for all non-financial undertakings, which shall be turnover.
By way of derogation from the first subparagraph, where a more representative calculation of the taxonomy alignment is given by capital expenditure or operating expenditure due to the features of the financial product, the calculation may use the most appropriate of those two indicators.
4. In the case of investee companies that are financial undertakings subject to Article 8(1) of Regulation (EU) 2020/852 and for other financial undertakings, the calculation referred to in paragraph 2 shall use key performance indicators referred to in points (b) to (e) of Section 1.1 of Annex III of Commission Delegated Regulation (EU) 2021/XXX [insert reference to Article 8 Taxonomy Regulation Delegated Act] .
5. For disclosures referred to in point (ii) of Article 16a(1)(a), point (ii) of Article 25(1)(a), point (iii) of Article 61a(b) and point (iii) of Article 67a(b), paragraphs 1 to 4 shall apply except that the sovereign exposures shall be excluded from the calculation of the numerator and of the denominator of the formula contained in paragraph 1.’
Share of taxonomy-aligned investments in pre-contractual disclosures
Some asset managers opposed the ex-ante identification of a quantitative percentage of taxonomy-aligned investments and urged to allow for a more qualitative disclosure of taxonomy-alignment instead.
It was argued that pre-contractual disclosures should not reflect data at a specific date but should focus on the strategy and what the portfolio manager is bound to do when making investment decisions.
The data should rather be included in the periodic report.
Many stakeholders suggested that the quantitative taxonomy-alignment ratio (pie chart) should be accompanied by a qualitative segment explaining how the Financial Market Participant plans to increase its share of taxonomy-aligned investments in both the pre-contractual and periodic disclosures.