The EU Taxonomy disclosure rules are based on the translation of environmental performance into financial variables.

                       
                                         
    

 

 

 

ESMA Public Statement of 25 October 2023 (European common enforcement priorities for 2023 annual financial reports, ESMA32-193237008-1793) highlights the regulatory authorities’ priorities related to non-financial statements and disclosures relating to Article 8 of the Taxonomy Regulation.

ESMA reminds issuers that, independently of the level of eligibility and alignment  of the respective economic activities, it is mandatory to use the latest reporting templates set out in the  Article 8 of the Commission Delegated Regulation (EU) 2021/2178. These templates must be used in the form provided for in the Delegated Act without any adaptation or amendments. For example, adaptations or amendments should not take place even in the event of non-eligibility or if an issuer applies the materiality exemption relating to the OpEx KPI.

ESMA further underlines that, when an economic activity substantially contributes to multiple  environmental objectives, double-counting shall be avoided when calculating the Key Performance  Indicators (KPIs) required by the Taxonomy Regulation. 

In these cases, the accompanying narrative disclosure should provide transparency on: 

(i) how an issuer assessed the compliance with the technical screening criteria with respect to multiple environmental objectives; 

(ii) the turnover, CapEx and OpEx that arise from the activities that contribute to multiple environmental objectives; and

(iii) explain how an issuer has addressed the occurrence of double counting, including the rationale for selecting one  specific objective over the multiple available objectives.  

In this respect, ESMA reminds issuers that, to be able to properly fulfil the applicable disclosure  requirements under the Taxonomy Regulation, they are expected to scan the economic activities they  undertake in light of the criteria set out in the relevant European Commission’s delegated acts  addressing the respective environmental objectives. 

Consequently, issuers are expected to test their economic activities for which relevant screening criteria exist. When screening criteria exist for the same economic activity under multiple objectives, issuers are expected to test that activity under all the relevant objectives. 

ESMA emphasises that these practices support the compliance with the applicable  disclosure requirements and ensure the completeness of the taxonomy assessment which is instrumental to enable financial market participants to develop financial products with genuine sustainability features.  

 

Explanations accompanying the taxonomy reporting

 

According to the ESMA improvements are particularly necessary with regards to how an issuer has assessed compliance with the substantial contribution criteria, as well as the ‘do-no- significant-harm’ and the minimum safeguards requirements. These accompanying disclosures – that are not necessarily limited only to qualitative information – should also address the key assumptions made in the preparation of the taxonomy information, including areas where they have exercised significant judgement. These disclosures should also provide the key elements of change compared to the previously reported figures and the related explanations. 

ESMA therefore recommends that issuers carefully prepare their accompanying disclosures to provide clear, complete and entity-specific (nonboilerplate) explanations about their taxonomy assessments.  

ESMA notes that while several issuers currently indicate in their Taxonomy reporting that they areseeking to expand their taxonomy-aligned activities, still too few issuers prepare and disclose theirCapEx plans. 

In this respect, in line with the European Commission’s Recommendation on transition finance, ESMA encourages issuers to carefully consider the development of CapEx plans with clearindication of the transition investments needed. These plans would increase the transparency towards investors and other providers of capital with regards to an issuer’s willingness and ability to put in place  measures to implement concrete and credible transition actions.  

ESMA also highlights that, whenever issuers develop CapEx plans that comply with the requirements  of the Taxonomy Regulation, they are required to include the related capital expenditures (ESMA highlights that these capital expenditures are eligible for inclusion in the CapEX KPI when they are part of a five-year (exceptionally ten-year) plan to expand Taxonomy-aligned economic activities or to allow Taxonomy-eligible economic activities to become Taxonomy-aligned) in thenumerator of the CapEx KPI and to disclose these plans accompanied by the relevant contextual  information. 

ESMA also notes that, except for OpEx in specific and duly justified cases of non-materiality, the  Taxonomy Regulation currently does not foresee the possibility of omitting information about any of the  other KPIs.  


Practical use cases regarding taxonomy reporting

 

Potential practical use cases regarding taxonomy reporting have been described in the document prepared for the European Commission in June 2023: "The EU Taxonomy User Guide" (p. 31 - 35) - see extract below.

 

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Use Case: Reporting against the EU Taxonomy for non-financial companies

What are the disclosure obligations related to the EU Taxonomy for a non-financial company?

 

Context

One of the key objectives of the EU Taxonomy is to increase transparency in the market and help reduce greenwashing by providing information to investors about the environmental performance of assets and economic activities of large financial institutions and large non-financial companies.

The Disclosures Delegated Act is therefore a key enabler of the EU Taxonomy as it specifies the information that large financial institutions and non-financial companies must provide to investors and wider stakeholders. Disclosure requirements aim to provide the market with information on: (1) companies whose activities comply with the EU Taxonomy criteria (through disclosure of the share of revenue from EU taxonomy-aligned activities); and, (2) companies that are taking steps to get there (through disclosure of green expenditure).

As the objective of your disclosure is to allow investors (or, more broadly, financial institutions) to make financing decisions, you will be required to translate your environmental performance into financial variables. Such a process will require new skills and new processes to be defined in your organisation.

Proposed approach to address your challenge

Step 1 - identify taxonomy-aligned economic activities (see Use Cases 1, 2, 3 and 4 for more information). The outcome of your assessment could be that only some of your activities are aligned.

For example, if your company manufactures specific equipment for buildings, only the activities related to the products meeting specific energy efficiency thresholds as defined in the technical screening criteria for substantial contribution to climate change mitigation included in Annex I to the Climate Delegated Act will be eligible.

Step 2 - disclose the key performance indicators (KPls) for each economic activity and the total KPIs for all economic activities at the level of the relevant company or group. Such information includes both the turnover from activities identified as taxonomy-aligned, as well as any capital expenditure (and specific operational expenditure) related to expanding these activities and maintaining them as EU taxonomy-aligned. Capital expenditure that are part of an investment plan aiming to make an activity taxonomy-aligned also counts.

The KPIs are defined as:

(1) The turnover KPI represents the proportion of your net turnover derived from products or services that are taxonomy-aligned. The turnover KPl gives a static view of your company's contribution to environmental goals.
The KPl shall be calculated as the part of the net turnover derived from products or services, including intangibles, associated with taxonomy-aligned economic activities (numerator), divided by the net turnover (denominator) as defined in Article 2, paragraph (5), of the Accounting Directive.

(2) The capital expenditure (CapEx) KPI represents the proportion of the capital expenditure of an activity that is either already taxonomy-aligned or is part of a credible plan (as defined by the Commission in the EAQs: What is the EU Taxonomy Article 8 delegated act and how will it work in practice?, question 6: This Disclosures Delegated Act considers that a credible plan is a necessary condition to ensure that companies are embarking on a trajectory aimed to make their economic activities taxonomy-aligned. A credible plan should minimise companies' reputational risks, support their environmental target and develop strategic and forward-looking business decisions.") to extend or reach environmental sustainability. The capital expenditure KPl provides a dynamic and forward-looking view of companies' plans to transform their business activities.

The denominator shall cover additions to tangible and intangible assets during the financial year considered before depreciation, amortisation and any re-measurements, including those resulting from revaluations and impairments, for the relevant financial year and excluding fair value changes. The denominator shall also cover additions to tangible and intangible assets resulting from business combinations.

The numerator shall be equal to the part of the capital expenditure included in the denominator that is

  • related to assets or processes that are associated with taxonomy-aligned economic activities; or,
  • part of a plan (considered as credible and feasible in the medium-term, ie., 5 years) to expand taxonomy-aligned economic activities or to allow taxonomy-eligible economic activities to become taxonomy-aligned; or,
  • related to the purchase of output from taxonomy-aligned economic activities and individual measures enabling the target activities to become low-carbon or to lead to greenhouse gas emission reductions (eg., building renovations), provided that such measures are implemented and operational within 18 months.

(3) The operational expenditure (OpEx) KPI represents the proportion of the operating expenditure associated with taxonomy-aligned activities or to the capital expenditure plan. The operating expenditure KPI covers essentially non-capitalised costs related to the maintenance and servicing of companies' assets (plant, equipment) that are necessary to ensure the continued and effective use of assets.
The denominator shall cover direct non-capitalised costs that relate to research and development, building renovation measures, short-term lease, maintenance and repair, and any other direct expenditures related to the day-to-day servicing of assets of property, plant and equipment by the undertaking or third party to whom activities are outsourced that are necessary to ensure the continued and effective functioning of such assets.
The numerator shall be equal to the part of the operating expenditure included in the denominator that is:

  • related to assets or processes associated with taxonomy-aligned economic activities, including training and other human resources adaptation needs, and direct non capitalised costs that represent research and development; or,
  • part of the CapEx plan to expand taxonomy-aligned economic activities or allow taxonomy-eligible economic activities to become taxonomy-aligned within a predefined timeframe; or,
  • related to the purchase of output from taxonomy-aligned economic activities and to individual measures, enabling the target activities to become low-carbon or to lead to greenhouse gas emission reductions as well as individual building renovation measures, provided that such measures are implemented and operational within 18 months. 

For example, a manufacturing company that produces among others, Taxonomy-aligned energy efficiency equipment buildings report:

(1) its net turnover from selling its energy efficiency equipment for buildings as its share of taxonomy-aligned turnover based on the proportion of turnover that those activities

(2) new investment to expand a foctory that produces the Toxonomy aligned energy efficiency equipment for buildings as its share of Taxonomy-aligned capital expenditure t based on the proportion of capital expenditure dedicated to this investment.

(3) expenditures on purchases of Taxonomy-aligned energy (e.g. renewable energy) or other Taxonomy-aligned inputs for its production process as its share of Taxonomy-aligned operating expenditure.

Exception: for the environmental objective of climate change adaptation (unless for enabling activities), only the capital or operating expenditures related to making an activity climate-resilient should be taken into account. The turnover associated with the activity itself should not be counted unless it also qualifies as environmentally sustainable for its substantial contribution to another environmental objective.

For example, a manufacturing plant that does not comply with the criteria for substantial contribution to climate change mitigation, but is being renovated to improve its resilience against climate change, could count the renovation as taxonomy-aligned expenditure.

However, the turnover linked to the activity of the manufacturing plant, even after the plant has been made climate-resilient, would not count unless the products manufactured in the plant are taxonomy-aligned.


Step 3 - provide a breakdown of the KPIs based on the economic activity pursued, including transitional and enabling activities, and the environmental objective reached.

Annex Il to the Disclosures Delegated Act includes templates for the KPIs of non-financial companies.

For example, a part of the template for the disclosure of the proportion of tumover from products or services associated with taxonomy-aligned economic activities is shown below.

IMG 0572


Step 4 - identify the proportion of the turnover, CapEx and OpEx related to taxonomy-aligned economic activities and the proportion of the turnover, CapEx, and OpEx related to taxonomy eligible economic activities that do not meet the technical screening criteria over the total turnover, CapEx, and OpEx.

See templates provided in Annex Il of the Disclosures Delegated Act.

 

Step 5 - identify taxonomy-non-eligible economic activities and disclose the proportion of turnover, CapEx, and OpEx related to Taxonomy non-eligible activities over total turnover, CapEx, and OpEx.

See templates provided in Annex Il of the Disclosures Delegated Act. 

 

Step 6 - provide supplementary information to show the transition of your taxonomy-eligible economic activities towards Taxonomy alignment over time and explain the key elements for change of the three KPIs during the reporting period.

Remark: if your company prepares only individual non-financial statements, all the KPIs shall be provided at the level of the individual legal entity. If your company prepares consolidated non-financial statements, they shall be prepared at the level of the group.

 

Next steps and references

 

The reporting obligations will increase gradually, with the following schedule:

  • As of January 2022, all companies under the scope of the NFRD commenced reporting of what activities are considered to be taxonomy-eligible, i.e., are covered by the EU Taxonomy vs. those that are not covered.
  • As of January 2023, large non-financial companies under the scope of the NFRD will need to report Taxonomy alignment, i.e., what activities are aligned with the EU Taxonomy technical screening criteria vs. those that are not aligned. Large companies that were not covered under the NFRD but will now be subject of the CSRD will need to report in 2026 (for the reporting period 2025).

 IMG 0570 

For more information, you should refer to the Disclosure Delegated Act, the accompanying Staff Working Document and the related FAQs published by the European Commission:

  • Disclosures Delegated Act and its Annexes I and II
  • Staff Working Document on Article 8 of Taxonomy Regulation
    FAQs: What is the EU Taxonomy Article 8 delegated act and how will it work in practice?
  • FAQs: How should financial and non-financial undertakings report Taxonomy-eligible economic activities and assets in accordance with the Taxonomy Regulation Article 8 Disclosures Delegated Act?
  • FAQs: Draft Commission notice on the interpretation of certain legal provisions of the Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation on the reporting of eligible economic activities and assets.

 

Source: The EU Taxonomy User Guide, Document prepared for the European Commission, June 2023, p. 31 -35

 

 

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Use Case: Reporting against the EU Taxonomy for non-listed SMEs or non-EU companies (companies not legally established in the EU)

 

Your company is a non-listed SME or a non-EU company, therefore it will not need to comply with the Taxonomy disclosures referred to in the CSRD. How can you still use the EU Taxonomy to measure and report your impact on climate change adaptation and mitigation?

 

Context

 

Reporting alignment with the EU Taxonomy is not mandatory for your company, but there might be good reasons for you to start considering it already.

First, depending on market developments and the review mentioned in Article 9 of the Disclosures Delegated Act, financial institutions may gradually consider the degree to which their exposures align with the Taxonomy for all types of underlying companies, including non-listed SMEs and non-EU companies, not subject to the Taxonomy disclosures under the CSRD. Therefore, if your business has European investors, they will likely be asking questions about your alignment with the EU Taxonomy.

Second, European companies operating globally will be likely to apply the EU Taxonomy lens to their global operations. While the EU Taxonomy is an EU regulation, it will have implications for foreign markets that conduct business with Europe or European companies. If you are a supplier of large EU companies, your clients might also need some information on your products in order to assess and disclose the potential impacts of their own outputs (e.g., to assess Do No Significant Harm criteria for building materials).

Finally, you might consider applying the EU Taxonomy disclosure rules on a voluntary basis as its criteria might provide an important reference point to demonstrate the positive impact of your activities and therefore potentially retain or attract EU investors. For instance, SMEs that provide products or services in line with the EU Taxonomy, such as manufacturing of renewable energy or energy efficiency equipment, will have the option to use the EU Taxonomy as a tool to highlight the benefits and environmental contribution of their green activities and get easier access to green finance (e.g., a green loan of a bank linked to its green bonds issuance).

 

Proposed approach to address your challenge

 

Step 1 - Assess EU Taxonomy disclosure requirements.

For the reasons highlighted above, it might be important that your company already starts assessing the disclosure requirements sets in the EU Taxonomy (refer to Use Case 7) and identify your stakeholders' needs and the related required data to be collected.

For example, if your company manufactures specific equipment for buildings, you should assess how to calculate/report the turnover and expenditure KPIs related to taxonomy-aligned activities. The KPIs will potentially cover some of your products if they meet the energy efficiency thresholds as defined in the technical screening criteria for substantial contribution to climate change mitigation (see Annex I of the Climate Delegated Act).

 

Step 2 - Identify required skills and define reporting processes.

The EU Taxonomy disclosure rules are based on the translation of your environmental performance into financial variables. Such a process is not straightforward. Some requirements might be perceived as an administrative burden for smaller entities and represent an obstacle in relation to the correct and efficient voluntary reporting. It is therefore important to identify the new skills and processes that are required for your organisation.

Using the above example of a company manufacturing specific equipment for buildings, you will need to collect and assess environmental and social data on your energy efficient products to demonstrate alignment with the technical screening criteria and compliance with the minimum safeguards (see Use Case 2 to 6). You will also need to collect financial information to assess the share of turnover that those products represent, and the potential expenditures related to an extension, switch or development of the production capacity of those products.

 

Step 3 - Apply disclosure requirements to your economic activities identified as taxonomy-aligned and follow the process described in Use Case 7.

Those SMEs whose business model is focused on one green activity covered by the EU

Taxonomy will have only one set of criteria applicable to their business model.

For example, a small manufacturer of energy efficient windows could check relatively easily what share of its turnover, capital expenditure or operational expenditure is related to the sale of windows that comply with the EU Taxonomy criteria.

 

Next steps and references

 

Reporting obligations will be extended gradually, with the following schedule:

  • As of January 2022 (for the reporting period 2021), only entities that fall under the scope of the NFRD needed to report the proportion of their activities (or the proportion of their exposure to activities) that are considered as eligible in the EU Taxonomy vs. those that are not eligible or not covered. At this stage, entities are not required to assess Taxonomy-alignment of these activities. They are also only required to report against activities related to climate objectives (activities related to other objectives will only be published in 2023).
  • In 2023 (for the reporting period 2022), non-financial companies under the scope of the NFRD will need to report what activities are considered as aligned with the EU Taxonomy climate objectives.

As described in the previous chapter, the CSRD enlarges the scope of companies that will need to publish sustainability information to all large and all listed companies (with the exception of micro companies).

  • Large companies that were not covered under the NFRD but are now covered under the CSRD will need to report in 2026 (for the reporting period 2025).
  • Listed SMEs will need to report in January 2027 (for the reporting period 2026).
    They may however decide to opt out of the reporting requirements for a further two years.

For more information, you should refer to the Disclosure Delegated Act, the accompanying Staff Working Document and the related FAQs published by the European Commission:

  • Disclosures Delegated Act and its Annexes I and I|
  • Staff Working Document on Article 8 of Taxonomy Regulation
  • FAQs: What is the EU Taxonomy Article 8 delegated act and how will it work in practice?
  • FAQs: How should financial and non-financial undertakings report Taxonomy-eligible economic activities and assets in accordance with the Taxonomy Regulation Article 8 Disclosures Delegated Act?
  • FAQs: Draft Commission notice on the interpretation of certain legal provisions of the Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation on the reporting of eligible economic activities

 

Source: The EU Taxonomy User Guide, Document prepared for the European Commission, June 2023, p. 49 - 51


 
The review of regulatory compliance

 

The ESMA document of 26 March 2024 „2023 Corporate Reporting Enforcement and Regulatory Activities Report” (ESMA32-193237008-8269) presents the review of regulatory compliance as regards disclosures relating to Article 8 of the Taxonomy Regulation. ESMA recalled that the financial year 2022 was the first time that non-financial undertakings were required to report not only the taxonomy eligibility, but also the taxonomy alignment, of their economic activities vis-à-vis the climate change mitigation and adaptation objectives.

To provide timely feedback to the market, ESMA and enforcers carried out a fact-finding exercise on the reporting under the Disclosures Delegated Act (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), whose results were published in October 2023. 

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