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Disclosures under Taxonomy Regulation Article 8 Delegated Act

Ruth Knox, Senior Lawyer in the Environment & Climate Change practice at Linklaters, outlines the background to and requirements of the recently adopted Delegated Act on Article 8 disclosures under Taxonomy Regulation.

The EU Taxonomy Regulation sets out an EU-wide framework (a classification system known as a ‘taxonomy’) according to which investors and businesses can assess whether certain economic activities are environmentally sustainable. For more information on the Taxonomy Regulation, see here.

Article 8 of the Regulation requires undertakings covered by 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.

At present, the NFRD applies to “large public interest entities” (large PIEs) – that is, those which have more than 500 employees; a balance sheet total of €20 million and/or net turnover of €40 million; and which are one of the following types of entities: (i) EU entities that have transferable securities admitted to trading on an EU regulated market; (ii) EU credit institutions; (iii) EU insurance undertakings; and (iv) EU entities that are designated by Member States as public-interest entities.

However, the Commission is proposing to extend the scope of the NFRD under a recent proposal for a Corporate Sustainability Reporting Directive (CSRD) (see here). If adopted, the CSRD would extend the scope of the regime from large PIEs to all large companies (listed or not) and all listed companies (except for listed micro-enterprises). “Large companies” for these purposes means companies exceeding two out of three of the following criteria: a balance sheet total of €20 million; net turnover of $40 million; and an average number of employees during the financial year of more than 250.

Article 8(2) of the Taxonomy Regulation requires non-financial undertakings to use three key performance indicators (KPIs):

  • the proportion of their turnover;
  • their capital expenditure (CapEx); and
  • their operating expenditure (OpEx) related to environmentally sustainable activities.

Article 8 does not specify any KPIs to be used by financial undertakings. Article 8(4) requires the Commission to adopt, by 1 June 2021, a delegated act specifying the content, presentation and methodology of the information to be disclosed by financial and non-financial undertakings subject to the NFRD.

Article 27 states that the reporting requirements in Article 8 should apply:

  • From 1 January 2022, as regards the first two environmental objectives (climate change adaptation and mitigation) of the Taxonomy Regulation.
  • From 1 January 2023, to the other four environmental objectives (water; circular economy; pollution control; and biodiversity).

The Commission asked the three European Supervisory Authorities – the European Markets and Securities Authority (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Banking Authority (EBA) – for advice on the content, methodology and presentation of the KPIs that non-financial and financial undertakings are required to disclose under Article 8 of the Taxonomy Regulation.

Delegated Act setting out detail of Article 8 disclosures

On 6 July, the European Commission adopted a Delegated Act (DA) setting out the content, methodology and presentation of the KPIs that non-financial and financial undertakings are required to disclose under Article 8 of the Taxonomy Regulation. See this Commission webpage for links to Annexes 1-11 to the DA, as well as an FAQ and a Commission Staff Working with background to the DA.

The DA is now subject to a four-month scrutiny period (which can be extended by a further two months) by the European Parliament and Council. If no objections are raised, the DA will be published in the Official Journal and enter into force 20 days after that.

Unhelpfully, despite push back from the industry, the Commission has not delayed the application date of the regime – with in-scope undertakings still expected to report in 2022 for FY 2021. As per the previous draft of the DA, for that first report due in 2022, financial and non-financial undertakings only have to disclose on the taxonomy eligibility of their business (rather than taxonomy alignment). However, that is still a considerable exercise for financial undertakings in particular, who do not currently classify their clients based on the NACE classification system underpinning the taxonomy.

However, helpfully, the DA has now pushed back the taxonomy alignment disclosures for financial institutions by two years, so that they start from 1 January 2024 (for FY 2023). Whereas in-scope corporates will be expected to report on taxonomy alignment from 1 January 2023 (for FY 2022). This is a welcome development, as it gets round the issue that was raised under the previous draft as now financial undertakings should have at least one set of taxonomy alignment disclosures from their large EU corporate clients (for FY 2022) to leverage for the purposes of their first taxonomy alignment report due in 2024.

The DA does not otherwise make substantial changes to the previous draft of the DA. Derivatives are still excluded from the KPIs and unhelpfully the rules still do not permit firms to include in the numerator of their taxonomy alignment KPIs, the taxonomy alignment of any clients that are EU companies not in scope of NFRD (e.g. SMEs) or non-EU companies. This would effectively mean that most financial institutions have very low taxonomy alignment KPIs. Although the rules envisage that such clients could be included in the numerators from 2025, subject to the work the Commission is doing on the development of guidelines for simplified voluntary provision of taxonomy-related data by non-NFRD/non-EU companies (as part of a broader project relating to non-financial voluntary reporting by companies that do not fall under the scope of the NFRD).

Overview of disclosure requirements

This DA specifies the content, methodology and presentation of information to be disclosed by financial and non-financial undertakings concerning the proportion of environmentally sustainable economic activities in their business, investments or lending activities.

The application of the DA in 2022 is 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. The KPIs of credit institutions related to their trading book and commission and fees for other commercial services and activities than the provision of financing apply from 1 January 2026. From 1 January 2022 until 31 December 2022, non-financial undertakings shall only disclose the proportion of taxonomy-eligible and taxonomy non-eligible economic activities in their total turnover, capital and operational expenditure and the qualitative information referred to in Section 1.2. of Annex I relevant for this disclosure.

Due to the current lack of an appropriate calculation methodology, exposures to central governments, central banks and supranational issuers are excluded from the calculation of the numerator and denominator of KPIs. Financial undertakings may, on a voluntary basis, provide information in relation to exposures to taxonomy aligned bonds and taxonomy aligned debt securities that are issued by central governments, central banks or supranational issuers.

The Commission will review the application of the DA by 30 June 2024 to evaluate the possibility of including such exposures in the KPIs.

KPIs for non-financial undertakings

The DA largely follows ESMA’s advice to further specify the definitions and methodology for calculating the three KPIs based on turnover, CapEx and OpEx provided for non-financial undertakings in Article 8(2) of the Taxonomy Regulation.

Non-financial undertakings must provide a breakdown of the KPIs based on the economic activity pursued, including transitional and enabling activities, and the environmental objective reached.

In addition, to ensure greater transparency, a specific accompanying ratio should be provided for the share of taxonomy-eligible economic activities and the share of economic activities that are not covered by the EU taxonomy in a company’s turnover, CapEx and OpEx.

The DA requires non-financial companies to provide for accompanying qualitative information that should help explain the calculation and the key elements for change of the three KPIs during the reporting period.

Finally, following ESMA’s advice, the DA requires that each of the three KPIs be presented based on a standardised template.

KPIs for financial undertakings

In respect of financial undertakings, the DA defines specific KPIs and calculation methodologies to be used.

Asset managers

The DA defines one KPI for asset managers. This KPI is defined as the proportion of environmentally sustainable investments managed by an asset manager in the value of all investments from both its collective and individual portfolio management activities (green investments ratio).

In particular, asset managers must provide a breakdown by:

  • each environmental objective and aggregated environmentally sustainable economic activities;
  • a subset of transitional and enabling economic activities; and
  • and type of investment (instrument).

Credit institutions

The DA defines three KPIs for credit institutions:

  • 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.

Where relevant, credit institutions should also disclose information related to their trading portfolios. However, only the main KPI and the KPI for off-balance sheet exposures apply initially while the KPIs for commissions and fees, and for trading activities, apply at a later date.

The main KPI for credit institutions is the green asset ratio (GAR), which is defined as the proportion of a credit institution’s assets invested in environmentally sustainable economic activities as a share of total relevant assets. The GAR should be calculated based on the on-balance-sheet exposures (assets) based on the prudential scope of consolidation for the types of assets.

Credit institutions should disclose the aggregate GAR for total on-balance-sheet covered assets and provide a breakdown by the:

  • environmental objective pursued by environmentally sustainable assets;
  • type of counterparty; and
  • subset of transitional and enabling activities.

Investment firms

Investment firms must disclose a KPI for their core investment services and activities dealing on own account and a KPI for those services and activities not dealing on own account.

Insurers and reinsurers

Insurance or reinsurance undertakings must disclose the KPIs related to their investments and underwriting activities.

The first KPI relates to the investment policy of insurers and reinsurers. The second KPI relates directly to their underwriting activities.

The KPI related to investments should be calculated as the proportion of the investments of insurance or reinsurance undertakings that are associated with environmentally sustainable economic activities in relation to their total relevant investments.

The KPI related to underwriting activities should be calculated as the proportion of the ‘non-life gross premiums written’ corresponding to environmentally sustainable insurance activities as defined in Climate Delegated Act (insurance related to climate adaptation) in relation to total non-life gross premiums written.

Sovereign and central bank exposures

Sovereign and central bank exposures and investment in sovereign debt are excluded from the numerator and denominator of the KPIs of financial institutions.

The Commission will assess at a later stage whether and how to develop a methodology for assessing the environmental performance of sovereign exposures.


Derivatives are generally excluded from the numerator of KPIs of financial undertakings in view of their use to mitigate counterparty risk rather than for financing or investment.

Details of the main changes from the draft Delegated Act

Under Article 7(1), supranational issuers are now also excluded from the calculation of the numerator and denominator of key performance indicators of financial undertakings.

Under Article 7(4), debt securities with the purpose of financing specific identified activities that are issued by an investee undertaking must be included in the numerator of KPIs up to the full value of taxonomy-aligned economic activities that the proceeds of the debt securities finance, on the basis of information provided by the investee undertaking.

Exposures whose purpose is not to finance specific identified activities must 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.

Where an investee undertaking has issued the environmentally sustainable bonds or debt securities with the purpose of financing specific identified activities, financial undertakings must discount the KPI of the investee undertaking accordingly to avoid double counting.

Under Article 7(5), where the technical screening criteria laid down in the delegated acts adopted pursuant to Articles 10(3), 11(3), 12(2), 13(2), 14(2) or 15(2) of the Taxonomy Regulation are amended, special purpose loans and environmentally sustainable bonds or debt securities with the purpose of financing specific identified activities, held by financial undertakings that finance taxonomy-aligned economic activities or assets must (in the absence of alignment of the financed economic activities or assets with the amended technical screening criteria) be reported as such under the DA until five years after the date of application of the delegated acts that amend those technical screening criteria.

Financial undertakings may use estimates for assessing the taxonomy alignment of their exposures to undertakings referred to in Article 7(6), in respect of the following:

  • 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 the NFRD; and
  • exposures to and investments in financial undertakings established in a third country that are not subject to an obligation to publish a non-financial statement pursuant to NFRD,

where those financial undertakings are able to demonstrate compliance with all criteria of Article 3 of the Taxonomy Regulation, except with the criteria laid down in Article 3, point (b) of the Taxonomy Regulation.

Financial undertakings are required to 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 must disclose the:

  • proportion of taxonomy-aligned exposures based on estimates separately from their KPIs disclosed pursuant to the DA; and
  • measures taken and the period of time necessary to demonstrate compliance with the criteria laid down in Article 3, point (b) of the Taxonomy Regulation.

With regard to Article 8(3), which provides for the obligation of financial undertakings and non-financial undertakings to provide the KPIs covering the previous annual reporting period in the non-financial statement, the first annual reporting period will cover the year 2023.

Pursuant to Article 8(4), financial undertakings are obliged to use the most recently available data and KPIs of their counterparties to calculate their own KPIs.

The KPIs must cover only the objectives of climate change mitigation and adaptation until 12 months after the date of application of the delegated acts that contain the technical screening criteria for the other environmental objectives and that have been adopted pursuant to Articles 12(2), 13(2), 14(2) and 15(2) of the Taxonomy Regulation.

The Commission has also changed the date for review of the application of the DA to the earlier date of 30 June 2024, from 1 January 2025.

This commentary was co-authored by Linklaters colleague Dearbhla Cantwell (Associate – Environment & Climate Change, London). Both Ruth and Dearbhla are also members of the firm’s global, cross-practice Environment, Social and Governance team.

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