Taxonomy Key Performance Indicators (KPIs) are differentiated along the line: financial/non-financial undertakings.

         
                                                                         
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24 March 2022

Updated Joint ESA Supervisory Statement on the application of the Sustainable Finance Disclosure Regulation, JC 2022 12

The ESAs recommend that national competent authorities and market participants use the current interim period from 10 March 2021 until 1 January 2023 to prepare for the application of the forthcoming Commission Delegated Regulation containing the Regulatory Technical Standards (RTS) while also applying the relevant measures of SFDR and the Taxonomy Regulation according to the relevant application dates outlined in the supervisory statement.

Disclosures under Article 5 and 6 of the Taxonomy Regulation

The ESAs clarify that, under Article 5 and 6 of the Taxonomy Regulation, the supervisory expectation for disclosures during the interim period is that financial market participants should provide an explicit quantification, through the numerical disclosure of the percentage, of the extent to which investments underlying the financial product are taxonomy-aligned.
In addition, while estimates should not be used, where information is not readily available from investee companies’ public disclosures, financial market participants may rely on equivalent information on taxonomy-alignment obtained directly from investee companies or from third party providers.
This updated statement replaces the initial joint supervisory statement, which was released in February 2021.

 


The respective definitions can be found in Article 1 points 8 and 9 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.

 


Article 1 points 8 and 9 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.

(8) ‘financial undertaking’ means an undertaking that is subject to the disclosure obligations laid down in Articles 19a and 29a of Directive 2013/34/EU and is an asset manager, a credit institution as defined in Article 4(1), point (1), of Regulation (EU) No 575/2013 of the European Parliament and of the Council, an investment firm as defined in Article 4(1), point (2), of Regulation (EU) No 575/2013, an insurance undertaking as defined in Article 13, point (1), of Directive 2009/138/EC of the European Parliament and of the Council, or a reinsurance undertaking as defined in Article 13, point (4) of Directive 2009/138/EC

(9) ‘non-financial undertaking’ means an undertaking that is subject to the disclosure obligations laid down in Articles 19a and 29a of Directive 2013/34/EU and is not a financial undertaking as defined in point (8)

 
There are also some disclosure rules common to all financial undertakings and non-financial undertakings - Article 8 of the Commission Delegated Regulation (EU) 2021/2178, in particular:

  • financial undertakings and non-financial undertakings shall include all additional disclosures accompanying the key performance indicators in the same parts of the non-financial statement that contains those indicators, or shall provide cross-references to the parts of the non-financial statements that contain those indicators;
  • information disclosed shall cover the annual reporting period from the previous calendar year of the date of disclosure;
  • financial undertakings and non-financial undertakings shall provide in the non-financial statement the key performance indicators covering the previous annual reporting period;
  • the first annual reporting period shall cover the year 2023;
  • financial undertakings and non-financial undertakings shall in their disclosures, use the same currency as in their financial statements.

 

KPIs to be used by non-financial undertakings

 

Article 8 of the Taxonomy Regulation obliges undertakings covered by Directive 2014/95/EU (the Non-Financial Reporting Directive, NFRD) to publish information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation.

 

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Non-financial companies are required to disclose the proportion of environmentally sustainable economic activities that align with the EU taxonomy criteria.

The translation of environmental performance into financial variables (turnover, CapEx and OpEx KPIs) allows investors and financial institutions to have clear and comparable data to help them with their investment and financing decisions.

  

For this purpose, non-financial undertakings are required to comply with that disclosure obligation to use three key performance indicators (‘KPIs’), related to environmentally sustainable economic activities, namely: 

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Taxonomy Regulation,

Recital 22

In its communication of 20 June 2019 on ‘Guidelines on non-financial reporting: Supplement on reporting climate- related information’, the Commission recommends that certain large companies report on certain climate-related key performance indicators (KPIs) that are based on the framework established by this Regulation. In particular, information on the proportion of the turnover, capital expenditure (CapEx) or operating expenditure (OpEx) of such large non-financial companies that is associated with environmentally sustainable economic activities, as well as KPIs that are tailored for large financial companies, is useful to investors who are interested in companies whose products and services contribute substantially to any one of the environmental objectives set out in this Regulation. It is therefore appropriate to require the annual publication of such KPIs by such large companies and to further define that requirement in delegated acts, in particular with regard to large financial companies. While it would be disproportionately burdensome to extend such a requirement to smaller companies, smaller companies may voluntarily decide to publish such information.

Article 8

Transparency of undertakings in non-financial statements

1. Any undertaking which is subject to an obligation to publish non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU shall include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9 of this Regulation.

2. In particular, non-financial undertakings shall disclose the following:

(a) the proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9; and

(b) the proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9.

3. If an undertaking publishes non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU in a separate report in accordance with Article 19a(4) or Article 29a(4) of that Directive, the information referred to in paragraphs 1 and 2 of this Article shall be published in that separate report.

4. The Commission shall adopt a delegated act in accordance with Article 23 to supplement paragraphs 1 and 2 of this Article to specify the content and presentation of the information to be disclosed pursuant to those paragraphs, including the methodology to be used in order to comply with them, taking into account the specificities of both financial and non- financial undertakings and the technical screening criteria established pursuant to this Regulation. The Commission shall adopt that delegated act by 1 June 2021.

 

 

The plan that accompanies both the CapEx and OpEx KPIs must be disclosed at the economic activity aggregated level and meet the following conditions:

- it shall aim to extend the scope of taxonomy-aligned economic activities or it shall aim for economic activities to become taxonomy-aligned within a period of maximum 10 years;

- it shall be approved by the management board of non-financial undertakings or another body which has been delegated this task.

The 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. In addition, non-financial companies should provide for a breakdown of the KPIs based on the economic activity pursued, including:

and the environmental objective reached. 

To ensure greater transparency, specific information should be reported on the shares of:
- the taxonomy-eligible economic activities, and
- the economic activities that are not covered by the taxonomy-related delegated acts.

Interestingly, companies are not required to disclose the assessments about the technical screening criteria (TSC) that taxonomy-eligible economic activities fail to meet, but may do so voluntarily, in particular to attract investors to finance their plans to reach taxonomy-alignment in the future.

The combination of this accompanying information with the three KPIs is important for a company to finance and show over time the transition of its taxonomy-eligible economic activities towards taxonomy-alignment.

Non-financial companies are required to provide for accompanying qualitative information about the calculation and the key elements for change of the three KPIs during the reporting period.

Detailed requirements as to the content and calculation of the KPIs of non-financial undertakings are stipulated in Annex I to the Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 by specifying the content and presentation of information to be disclosed by undertakings subject to Article 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation.

The information referred to above is to be presented in tabular form by using the templates set out in Annex II to the Commission Delegated Regulation of 6 July 2021.
In particular, according to the said Commission Delegated Regulation of 6 July 2021 non-financial undertakings are required to publish information on assessment of compliance with the Taxonomy Regulation:

(a) to describe the nature of their taxonomy-eligible and taxonomy-aligned economic activities, by referring to the Taxonomy Regulation delegated acts;

(b) to explain how they assessed compliance with the criteria for environmentally sustainable economic activities set out in Article 3 of Taxonomy Regulation and the associated technical screening criteria included in the delegated acts referred to in point (a);

(c) to explain how they avoided any double counting in the allocation in the numerator of turnover, CapEx, and OpEx KPIs across economic activities.

 

KPIs to be used by financial undertakings

 

Given that Article 8 of the Taxonomy Regulation does not specify any KPIs to be used by financial undertakings (that is credit institutions, asset managers, investment firms and insurance and reinsurance undertakings) the key performance indicators for financial undertakings are specified by 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.

The three key performance indicators for non-financial undertakings laid down in Article 8(2) of the Taxonomy Regulation (turnover, capital expenditure and operating expenditure) were considered by the European Banking Authority (EBA) irrelevant for assessing the environmental sustainability of financial activities (including lending, investment and insurance) and, therefore, not appropriate to demonstrate to what extent the economic activities of financial undertakings are taxonomy-aligned (EBA in its March 2021 response to the European Commission's call for advice from September 2020).

EBA instead suggested using the green asset ratio (GAR), which measures the share of a credit institution’s taxonomy-aligned balance sheet exposures versus its total eligible exposures. The said Commission Delegated Regulation of 6 July 2021 provides therefore specific key performance indicators and calculation methodologies for financial undertakings. Under the Commission Delegated Regulation of 6 July 2021 the main KPIs for financial undertakings (banks, investment firms, asset managers, insurers) relate to the proportion of environmentally sustainable economic activities in their financial activities, such as lending, investment and insurance (see for example: Taxonomy KPIs - investment firms’ disclosures).

In turn, the main key performance indicator for credit institutions is the GAR. Recital 5 of the Delegated Act of 6 July 2021 refers to the fact that the main activity of credit institutions is the provision of financing to and investments in the real economy, hence the exposures of credit institutions to undertakings that they finance or invest in are reflected as assets in the credit institutions’ balance sheet. The said Recital 5 designates the GAR (showing the proportion of exposures related to taxonomy-aligned activities compared to the total assets of those credit institutions) as the main key performance indicator for credit institutions that are subject to the disclosure obligations laid down in Articles 19a and 29a of Directive 2013/34/EU. The GAR should relate to the credit institutions’ main lending and investment business, including loans, advances and debt securities, and to their equity holdings to reflect the extent to which those institutions finance taxonomy-aligned activities.

According to Article 4 of the Delegated Act of 6 July 2021 credit institutions are required to disclose the information as specified in respective Annexes V and XI. Specifically, as regards credit institutions the Delegated Act of 6 July 2021 defines three KPIs:
- a main KPI for on-balance-sheet assets related to financing activities,
- KPIs for off-balance-sheet assets and
- a KPI for commissions and fees related to other activities than financing.

In addition to disclosures concerning their banking book, credit institutions should also disclose separately the overall composition of their total assets, including their trading book, and any trends and limits in terms of climate and environmental risks.

According to Article 7 of the Delegated Act of 6 July 2021:

- derivatives shall be excluded from the numerator of key performance indicators of financial undertakings;

- exposures whose purpose is not to finance specific identified activities shall be included in the numerator weighted by the turnover KPI and CapEx KPI of the issuer in accordance with the methodology laid down in Annexes III, V, VII, and IX to the Delegated Act.

Financial undertakings are required to provide for a breakdown in the numerator where applicable and denominator of the key performance indicators for:
(a) exposures to and investments in non-financial undertakings;
(b) exposures to and investments in financial undertakings;
(c) exposures to and investments in non-financial undertakings established in the Union that are not subject to an obligation to publish a non-financial statement pursuant to Articles 19a and 29a of Directive 2013/34/EU;
(d) exposures to and investments in financial undertakings established in the Union that are not subject to an obligation to publish a non-financial statement pursuant to Articles 19a and 29a of Directive 2013/34/EU;
(e) exposures to and investments in non-financial undertakings established in a third country that are not subject to an obligation to publish a non-financial statement pursuant to Articles 19a and 29a of Directive 2013/34/EU;
(f) exposures to and investments in financial undertakings referred established in a third country that are not subject to an obligation to publish a non-financial statement pursuant to Articles 19a and 29a of Directive 2013/34/EU;
(g) exposures to and investments in derivatives;
(h) other exposures and investments.

Financial undertakings may use estimates for assessing the taxonomy-alignment of their exposures to undertakings referred to in points (e) and (f), where those financial undertakings are able to demonstrate compliance with all criteria of Article 3 of Regulation (EU) 2020/852, except with the criteria laid down in Article 3, point (b) of that Regulation.

Financial undertakings shall formalise, document and make public the methodology upon which such estimations are based, including the approach and research methodology, the main assumptions and precautionary principles used.

Financial undertakings shall disclose:
(a) the proportion of Taxonomy-aligned exposures based on estimates separately from their key performance indicators disclosed pursuant to this Regulation;
(b) the measures taken and the period of time necessary to demonstrate compliance with the criteria laid down in Article 3, point (b) of Regulation (EU) 2020/852.

All undertakings will have to start disclosing how their business activities align with:
- the climate objectives (adaptation and mitigation) under the EU Taxonomy Regulation in the course of 2022 (covering financial year 2021) and
- all six environmental objectives in the course of 2023 (covering financial year 2022).

Recital 12 of Regulation of 6 July 2021 reads:

"In view of the entry into force and application of Climate Delegated Act by the end of 2021 and material difficulties for assessing compliance of economic activities in 2022 with technical screening criteria laid down in that Delegated Regulation for the previous reporting year, the application of this Regulation in 2022 should be limited to certain elements and qualitative reporting, with the remaining provisions starting to apply from 1 January 2023 for non-financial undertakings and from 1 January 2024 for financial undertakings. Moreover, the key performance indicators of credit institutions related to their trading book and commission and fees for other commercial services and activities than the provision of financing should apply from 1 January 2026".

 

chronicle   Regulatory chronicle

 

 

24 March 2022


Updated Joint ESA Supervisory Statement on the application of the Sustainable Finance Disclosure Regulation, JC 2022 12

 

The ESAs recommend that national competent authorities and market participants use the current interim period from 10 March 2021 until 1 January 2023 to prepare for the application of the forthcoming Commission Delegated Regulation containing the Regulatory Technical Standards (RTS) while also applying the relevant measures of SFDR and the Taxonomy Regulation according to the relevant application dates outlined in the supervisory statement.

 

Disclosures under Article 5 and 6 of the Taxonomy Regulation


The ESAs clarify that, under Article 5 and 6 of the Taxonomy Regulation, the supervisory expectation for disclosures during the interim period is that financial market participants should provide an explicit quantification, through the numerical disclosure of the percentage, of the extent to which investments underlying the financial product are taxonomy-aligned.
In addition, while estimates should not be used, where information is not readily available from investee companies’ public disclosures, financial market participants may rely on equivalent information on taxonomy-alignment obtained directly from investee companies or from third party providers.
This updated statement replaces the initial joint supervisory statement, which was released in February 2021.

 

22 October 2021

 

ESA’s Final report 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

 

The draft RTS aim to:
- provide disclosures to end investors regarding the investments of financial products in environmentally sustainable economic activities, providing them with comparable information to make informed investment choices; and
- establish a single rulebook for sustainability disclosures under the SFDR and the Taxonomy Regulation.


The Report contains the following proposals:
1. For products under Articles 5 and 6 of the Taxonomy Regulation
a. inclusion of pre-contractual and periodic disclosures that identify the environmental objectives to which the product contributes and show how and to what extent the product’s investments are aligned with the EU Taxonomy
b. for measuring how and to what extent activities funded by the product are aligned with the EU taxonomy, the proposals consist of two elements:
- two graphs showing the taxonomy-alignment of investments of the financial product based on a specified methodology that calculates that alignment; and
- an assurance provided by an auditor or a review by a third party that the economic activities funded by the product that qualify as environmentally sustainable are compliant with the detailed criteria of the Taxonomy Regulation.
2. For pre-contractual and periodic disclosures: inclusion of annexes with amendments to the mandatory templates for financial products that promote environmental and/or social characteristics or have a sustainable investment objective as defined in the SFDR, so that they include additional disclosures for Article 5 and Article 6 products under the Taxonomy Regulation.

 

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