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.

 

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 activities, namely:

 

 

 

                                                                                                                                                           quote                                                                                                            
           
 
 


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.
 

 

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 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.

 


Taxonomy Regulation, 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.

 

 

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 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.
 

Turnover, capital expenditure and operating expenditure are irrelevant for assessing the environmental sustainability of financial activities, including lending, investment and insurance.

 

The three key performance indicators for non-financial undertakings laid down in Article 8(2) of the Taxonomy Regulation are therefore not appropriate to demonstrate to what extent the economic activities of financial undertakings are taxonomy-aligned.

 

The said Commission Delegated Regulation of 6 July 2021 provides therefore specific key performance indicators and calculation methodologies for such key performance indicators 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