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EU Taxonomy Reporting: An Investor’s Playbook

Tomas van der Heijden, CEO of Briink, offers a four-step guide to EU Taxonomy reporting for impact investors and financial service providers.

The EU Taxonomy poses considerable challenges and valuable opportunity for impact investors. This article outlines steps that investors and financial institutions need to take when approaching EU Taxonomy reporting.

STEP 1: Identify your sustainability goals and requirements

Before starting on EU Taxonomy assessment, take a closer look at the type of financial products your firm offers. Think strategically about your Taxonomy assessment needs.

There has been some confusion as to the exact requirements for Sustainable Finance Disclosure Regulation (SFDR) labeled-funds, and whether a Taxonomy eligibility assessment is needed for them.

While Taxonomy reporting is not always necessary for Article 8 funds, providing a justification of the fund’s environmental and social characteristics via Taxonomy eligibility, alignment and Do-No-Significant-Harm (DNSH) criteria is the most advanced way to demonstrate sustainability leadership to investors. Taxonomy alignment assessments will be mandatory for Article 9 due diligence and reporting once SFDR Level 2 enters into force. When the likelihood of proving  EU Taxonomy alignment is low, it might be advisable to secure an ‘ambitious’ Article 8 fund rather than overreach by trying to certify a fund as Article 9.

Does your firm have the capacity to build an Article 9 fund that is, and will remain, Taxonomy-aligned? Or is it realistic to stick with the Article 8 label? Reputational risks and access to the trillions of green capital should be factored into your answer.

STEP 2: Put together eligibility and alignment assessment

If target and portfolio companies already face mandatory disclosure requirements, gathering eligibility and alignment scores from annual or sustainability reports is rather straightforward for financial firms.

When asset managers cannot rely on portfolio firms’ mandatory reporting or data providers’ estimates (which currently can still be used for reporting), lack of data can lead to a wasteful back-and-forth between investors and their investees. Private equity Article 9 funds – which lack both data provider coverage and existing portfolio firm reporting – face the most significant challenges in this space.

Sometimes, it will suffice to communicate directly with the portfolio company and encourage them to initiate a Taxonomy assessment setup. Alternatively, it may be worth considering external help and expertise in the form of reporting software and/or consultants to supply portfolio firms with the tools and knowledge needed. External support simplifies and accelerates Taxonomy reporting, and can help to maximise scores where data is hard to identify or small changes are needed.

STEP 3: Calculate the eligibility and alignment percentages of your financial products 

Once Taxonomy data has been gathered from portfolio companies, it is necessary to check and regroup the evidence to calculate the fund’s overall alignment percentage.

A helpful tip: even if a company or activity is not aligned with the Taxonomy, asset managers still have the option to account for DNSH or eligibility as part of Taxonomy disclosures for their Article 9 funds. While the extent of Taxonomy-disclosure requirements for Article 8 funds remains ambiguous, publishing Taxonomy information on a voluntary basis for DNSH and eligibility has significant reputational benefits.

STEP 4: Create the final report evaluating your entire fund or portfolio

To report against the Taxonomy, asset managers must first differentiate between product and entity-level disclosures. For portfolio alignment reporting, turnover-related KPIs and expenditure-related KPIs have to be reported separately.

A final piece of information to keep in mind: Since no EU Taxonomy periodic reports have been published by asset managers yet, no concrete ‘best practices’ can be employed. Nevertheless, reporting according to Taxonomy standards will benefit any asset manager that wishes to preserve its fund’s SFDR labels in the future, as well as other financial institutions.

This is why lenders and asset managers should lay down the foundations of Taxonomy reporting now. Filling the existing gaps both in eligibility and alignment assessment will make fund creation and due diligence processes easier and more streamlined in the future, allowing organisations to save significant time and resources. In the long run, virtuous funds will inevitably stand out from the crowd.

A full version of this article can be found on Briink’s website.

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