The final report on sustainability-related disclosures, including taxonomy-related disclosures (the “Draft RTS”), were published by the European Supervisory Authorities (the "ESAs") on 22 October 2021.
The Draft RTS set out amendments to the set of rules and mandatory templates for financial products, as well as providing for additional disclosures applicable to article 5 and article 6 products under the Taxonomy regulation. In order words, they require both an identification of the environmental objectives to which the economic activities funded by the product contribute and substantial disclosure on “how and to what extent” the economic activities the product invests in qualify as environmentally sustainable.
The key take-aways are the following:
1) An updated and clearer disclosure of:
a. The proportion of environmental or social sustainable investment by financial products and of these sustainable investment’s objectives
b. Consideration of principal adverse impacts:
a) If the assets underlying a financial product contribute to any environmental objectives listed in the Taxonomy regulation, the relevant pre-contractual disclosures and periodic disclosures should identify such objectives and include “how and to what extent” such products are taxonomy aligned.
The taxonomy-aligned share of investment now has to be represented in a graphical representation in the form of a pie chart (based on a specified methodology that calculates that alignment).
Further, an indication if an assurance, provided by an auditor or a review by a third party that the economic activities funded by the product that qualifies as environmentally sustainable are compliant with detailed criteria of the Taxonomy regulation, is provided.
b) The ESAs have provided further detail requiring the financial market participant to explain also how principal adverse impacts (PAI) are considered and a statement that this information is available in the annual report (according to article 7 (1) SFDR).
2) The do no significant harm principle.
For taxonomy aligned sustainable investments a derogation to apply the "Do No Significant Harm" ("DNSH") was possible (since already required under detailed DNSH rules of the Taxonomy regulation Technical Screening Criteria). However, in the final Draft RTS this derogation is no longer possible, and as a result, DNSH related rules will be applied to all sustainable investments, including taxonomy-aligned investments.
3) Treatment of Sovereign Bonds
Lastly, there have been clarifications regarding the method of calculations of taxonomy-aligned investments particularly the exposure to sovereign bonds and derivatives.
Regarding the specific issue of the treatment of sovereign bonds in the representation of the taxonomy-alignment of investments, the ESAs decided to require the disclosure of the taxonomy-alignment of investments in two ways: 1) one including sovereign exposures and 2) one excluding sovereign exposures from the calculation. These two key performance indicators ("KPIs") should be graphically presented and accompanied by the breakdown between enabling and transitional activities in accordance with article 5 Taxonomy regulation.
Next steps
The European Commission has three months, from their publication, to decide whether to endorse the draft RTS. The final rules were expected to enter into force in July 2022. However, on 25 November 2021 the European Commission informed the European Parliament and the Council that the draft regulatory technical standards jointly submitted on 22 October 2021 by the ESAs could not be adopted by the Commission within the three-month period. The European Commission is now confirming that the date of application of the Draft RTS is deferred to 1 January 2023.
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