The Sustainable Financing Disclosure Regulation (SFDR)¹ empowered the European supervisory authorities (AES)² develop draft regulatory technical standards (RTS) on taxonomy-related product disclosures. On March 15, 2021, the ESAs published a consultation document on draft regulatory technical standards regarding the content and presentation of sustainable development disclosures in accordance with Article 8 (4), 9 (6) and 11 (5) of the SFDR (the March taxonomy RTS). The March Taxonomy RTS made changes to the RTS that the AESs released in February 2021 for the SFDR, (the SFDR RTS).³ The AES decided to modify the SFDR RTS instead of creating a new set of rules, with the aim of minimizing duplication and complexity in this area. The objective of the ESAs is to have the RTS on Disclosure Rules function as a “one-stop-shop” for sustainability disclosures at Level 2, both for initial clearances in the SFDR and for the additional authorizations added by the taxonomy regulation.

October taxonomy RTS).⁴ In this OnPoint, we will provide an overview of the main changes introduced by the October taxonomy RTS compared to the original proposals set out in the March taxonomy RTS.

Calendar / Next Steps

The European Commission will review the October Taxonomy RTS and decide whether or not to approve it within three (3) months of its publication. The European Commission has informed the European Parliament and the Council of its intention to integrate all the SFDR RTS, i.e. the SFDR RTS submitted to the European Commission in February 2021 as well as the October taxonomic RTS, in a single instrument.

The October RTS application date is set for January 1, 2022, however, the ESAs noted that the European Commission is expected to adopt the single RTS instrument with an application date of July 1, 2022. This six-month deadline month is in line with what the ESAs suggested in their letter of July 8, 2021.⁵

Main proposals

1. Disclosure of environmental objectives has helped

The October RTS Taxonomy covers the content and presentation of additional information to SFDR product disclosures when the product makes sustainable investments that contribute to an environmental goal. ESA amended the March RTS Taxonomy to clarify that there are certain subsets of financial products that promote environmental or social characteristics (Article 8 Products) or whose objective is sustainable investment (Article 9 Products).

Article 8 The products can thus be classified as follows:

• Article 8 Products which promote environmental or social characteristics but which do not make sustainable investments;
• Article 8 Products that make sustainable investments with an environmental (or social) objective; and
• Article 8 Products which make sustainable investments with an environmental objective and at least some of those sustainable investments which meet the requirements of Article 3 of the taxonomy regulation (i.e. which are aligned with the taxonomy).

With regard to article 9 Products, the sub-assemblies can be considered as:

• Article 9 Products that make sustainable investments with an environmental (or social) objective; and
• Article 9 Products that make sustainable investments with an environmental objective and at least some of these sustainable investments are aligned with the taxonomy.

This provides some welcome clarity as to how to disclose certain information, and even whether disclosures are necessary given the characteristics of a particular product.

In addition, it should be noted that the content requirements of the mandatory templates for Article 8 products and Article 9 products with regard to taxonomic alignment have been clarified.

2. The extent to which investments are aligned with taxonomy

There is an obligation to provide both pre-contractual and periodic information as to the extent to which the investments in which the products invest are considered environmentally sustainable under the Taxonomy Regulation. As was the case with the March Taxonomy RTS, the October Taxonomy RTS proposes that pre-contractual disclosures of the extent of taxonomic alignment be presented by means of a pie chart graphical representation of a key performance. indicator (KPI).

However, the October RTS Taxonomy specifies that the default KPI for the purpose of calculating the taxonomic alignment of investments in non-financial companies is turnover. However, it is possible to use an alternative KPI, namely capital expenditure (Investment expenditure) or operating expenses (OpEx) – whether the characteristics of the financial product mean that CapEx or OpEx would be more appropriate and would give a more representative calculation of the taxonomic alignment. Unlike the March taxonomy RTS, the October taxonomy RTS does not state that the same KPI should be used for all investments in non-financial companies. For the sake of completeness, it should be mentioned that the calculation of the taxonomic alignment of investments in financial enterprises is defined in the delegated legislation relating to Article 8 of the Taxonomic Regulation.⁶

In contrast, the periodic disclosure of the taxonomic alignment of investments in non-financial companies should be displayed in a graphical representation of the three KPIs – Revenue, CapEx and OpEx – regardless of the KPI used in the pre-contractual disclosure. .

3. How investments are aligned with taxonomy – “do no significant harm”

To recap, there are basically two different ‘do no harm’ principles (DNSH) – one under the SFDR and the other under the taxonomy regulation. Article 2a of the SFDR provides a basis for the AES to develop a methodology around the DNSH that is consistent with those planned in relation to the negative impact indicators set out in appendix 1 of the SFDR RTS. In contrast, the DNSH requirement as set out in the taxonomy regulation states that in order to establish the extent to which an investment is environmentally sustainable, an economic activity must not significantly harm any of the environmental objectives set out in Article 9 of the taxonomy regulation as specified. in the Climate Taxonomy Delegated Act⁷ defining the technical criteria for selecting environmental objectives. In the March Taxonomy RTS, the AESs proposed to deviate from the general DNSH principle of the SFDR for taxonomy aligned investments on the grounds that taxonomy aligned investments would already be subject to the DNSH principle of the taxonomy regulation. However, following further legal analysis, the ESAs concluded that it is not possible to deviate from the general principle SFDR DNSH for sustainable investments aligned with taxonomy. Therefore, DNSH SFDR requirements will apply to all sustainable investments, including those aligned with taxonomy.

4. Treatment of sovereign bonds

The ESAs have decided to require disclosure of taxonomic alignment of investments in two ways with respect to their treatment of sovereign bonds: one including sovereign exposures⁸ and one excluding sovereign exposures from the calculation. The ESAs have taken this step by acknowledging the fact that there is currently a lack of an appropriate calculation methodology for sovereign exposures and that participants in financial markets “cannot assess to what extent these exposures contribute to economic activities aligned with the government. taxonomy ”.

The October RTS Taxonomy therefore contains a graph that includes all investments of the financial product in the calculation, and a second graph showing the taxonomic alignment of the financial product where all sovereign exposures are excluded from the calculation.

5. Taking into account (or not) the main negative impacts

The October RTS Taxonomy provides welcome details on the main negative impact declarations to be provided in accordance with article 7 of the SFDR. Specifically, there had been some uncertainty as to whether the main adverse impact statements were required for products referred to in Article 9. The wording of certain provisions of the March RTS Taxonomy indicated that for products of Article 8, the requirement was to explain “whether a financial product” considers the main negative impact, but for Article 9 products, the requirement was to “explain that the financial product contributes to a sustainable investment objective taking into account the main negative impacts ”- which implies that it was obligatory for the products of article 9 to make the main negative impact statements (which is not actually stipulated in the SFDR level 1 text).

The October RTS Taxonomy was amended so that Article 9 products must explain “whether the financial product takes into account the main negative impacts on sustainability factors”, specifying that it is not mandatory for Article 9 products to provide a main negative impact statement. Related changes have been made to the mandatory template.

Conclusion

The October RTS Taxonomy provides welcome clarity on what information is required, but the level of detail that financial market participants will be required to provide remains important. The market is watching with interest and hopes, if not anticipates, that the European Commission will agree to delay the application of all RTS until July 1, 2022. On a practical level, not delaying the application of the RTS will have an impact. severe impact on financial market players and products that will have less than two months to adapt their systems, procedures and information to comply with these more granular requirements.

It is important to note that any delay of the RTS will not have an impact on the application of the level 1 text of the taxonomy regulation – these provisions will be implemented on January 1, 2022.