ESAs consult on taxonomy-related sustainability disclosures for environmental products

The European Supervisory Authorities (ESAs) are currently consulting on the proposed regulatory technical standards (RTS) on the content and presentation of disclosures required under the Taxonomy Regulation. The Taxonomy Regulation amends the Sustainable Finance Disclosure Regulation (SFDR) to impose additional disclosure requirements, in particular for certain types of Article 8 and 9 products with an environmental focus, and introduces regulatory definitions for a range of environmental objectives, including climate change mitigation, pollution prevention and control, and the transition to a circular economy.

How does this RTS work with the SFDR RTS?

The ESAs have agreed to amend the soon to be finalised SFDR RTS (see our summary of the SFDR RTS). The aim is to have the RTS function as a “single rulebook” for sustainability disclosures at level 2 for both SFDR and the Taxonomy Regulation.

What does this RTS prescribe? 

Most notably, the RTS prescribes the following requirements.

1. Amended pre-contractual and periodic templates for products with an environmental focus

The RTS provides amended templates for pre-contractual and periodic disclosures in respect of Article 8 (light green) and Article 9 (dark green) products with an environmental characteristic or objective. These products are referred to respectively as Article 6 and Article 5 TR products. These are effectively a sub-set of the Article 8 and 9 SFDR products.

The consultation asks for views on the amended templates, and whether it would be preferable to have separate pre-contractual and periodic templates for Article 5-6 TR products, instead of using the same template for all Article 8-9 SFDR products.

2. A graphical representation of the share of taxonomy-aligned investments in Article 9 products

The Taxonomy Regulation requires that, in respect of Article 9 SFDR (dark green) products which invest in an economic activity that contributes to an environmental objective (as described in the definition of “sustainable investment” in SFDR), the pre-contractual disclosures should include a description of “how and to what extent” the underlying investments represent economic activities that qualify as environmentally sustainable. This should demonstrate the extent to which the financial product is taxonomy-aligned, i.e. environmentally focused.

An economic activity qualifies as environmentally sustainable if it:

• contributes substantially to one or more environmental objectives;
• does not significantly harm environmental objectives;
• achieves a minimum set of safeguarding criteria; and
• aligns with technical screening criteria established by Commission. The screening criteria were published by the Technical Expert Group on sustainable finance in March 2020.

The RTS requires that, for the purpose of this disclosure, the “extent” to which economic activities qualify as environmentally sustainable should be shown as a graphical representation of the share of taxonomy-compliant investments of the financial product, expressed as a weighted average of all investments. In the ESAs’ view, this graph, termed the Key Performance Indicator (KPI), is the only part of the sustainability disclosures that should be presented as a graphical comparison because it presents data based on a robust system of classification established in law (i.e. the Taxonomy Regulation). The RTS prescribes the calculation for this graphical representation in respect of different types of investment/investee companies.

The consultation asks several questions about the KPI, such as whether financial instruments that cannot be assessed for taxonomy-alignment, for instance sovereign bonds, should be included as part of the calculation of the financial product’s total investments against which its taxonomy-aligned investments should be compared.

What are the relevant deadlines? 

The consultation closes on 12 May 2021. The ESAs expect to publish a final report including the final draft RTS in late June or early July. The tight timeline is due to the requirement for the ESAs to finalise the RTS for products with climate-related objectives by 1 June 2021 (while the RTS for products with other environmental objectives are not due until 1 June 2022). It also suggests that the ESAs do not expect to make substantial revisions to the draft RTS in response to feedback received during the consultation period.

The application of the RTS is expected to follow the effective date of the Level 1 requirements in the Taxonomy Regulation: 1 January 2022 in relation to climate-related objectives; 1 January 2023 for all other environmental objectives.