Joint Consultation Paper of the ESA’s on Taxonomy Related sustainability disclosures

24 March 2021

ESMA, EIOPA and EBA issued a consultation paper on the proposed regulatory technical standards on the content and presentation of disclosures pursuant to Article 8(4), Article 9(6) and Article 11(5) of EU 2019/2088 (SFDR) in respect of the Taxonomy Regulation (TR). The consultation ends May 12, 2021.

The proposed Regulatory Technical Standards (RTS) look to integrate, and in some instances adapt, the RTS under the SFDR and also provide template disclosures under the Taxonomy regulations (TR).

Deadlines

The ESAs have agreed to create a single set of RTS for all environmental taxonomy-related disclosures covering the 6 objectives of Article 9 of the TR with 2 implementation dates (June 2021 and June 2022).

The proposed TR RTS provides amended templates covering taxonomy specific elements in preparation for the 2 deadlines:

June 1, 2021

Article 8, 9 and 11 pre-contractual and periodic product disclosures for environmental taxonomy products for climate change mitigation and climate change adaptation environmental objectives.

June 1, 2022

Products with sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control and protection and restoration of biodiversity and ecosystems environmental objectives.

The consultation sets forth recommended disclosures pertaining to the disclosures stated in both the Taxonomy Regulations and the SFDR, relating to investments with Environmental or Social characteristic or with a sustainable objective. Furthermore, details around Key Performance indicators (KPI) and associated methodology of quantifying and providing information around such investments is being proposed. This further enables information to be consistently measured and communicated.

Disclosures relating to Investments that are taxonomy aligned

The recommendation proposes that disclosures in respect of investments which are aligned with the taxonomy regulations include information on ‘how and to what extent’ the economic activities the product invests in qualify as environmentally sustainable.

Graphical representation of information

The ESA’s further propose that the ‘extent’ element in the taxonomy information should be a graphical representation of the share of taxonomy-compliant investments of the financial product (including but not limited to portfolio allocation considerations). Such visual representation of the data will enable investors to see the percentage of the portfolio that is aligned with the taxonomy regulation overall. These measures and metrics also build upon Key Performance Indicators (KPI’s) of the extent of the alignment of the investments as a weighted average of all investments.

Calculating the KPI

The ESA’s have proposed the following calculation and methodology:

The proposed Regulatory Technical Standards (RTS) look to integrate, and in some instances adapt, the RTS under the SFDR and also provide template disclosures under the Taxonomy regulations (TR).

Further clarification and detail has been put forward to identify the value to be used in the numerator, being driven by the type of activity as set out in the draft RTS, as follows:

Financial Product	Numerator
EU Green bond Standard bonds	100% of the value in the numerator
Other green bonds	Proportion of their value that corresponds to the share of the proceeds of those bonds used for environmentally sustainable economic activities
Non-financial investee companies	Value in the numerator should correspond to the value of the securities invested by the financial product in those companies weighted by either i) the share of turnover, or ii) capital expenditure or iii) operational expenditure contributed to environmentally sustainable economic activities
Financial undertaking investee companies	The value should correspond to the share of activities associated with environmentally sustainable activities disclosed by those companies under Article 8 TR

Sovereign Bonds

The draft RTS also proposes how sovereign bonds should be considered in the calculation of KPIs. In order to identify which investments are directed at funding economic activities that qualify as environmentally sustainable, there should be disclosure of the proportion of the product’s investments that are directed at funding economic activities that qualify as environmentally sustainable, in relation to the total investments in the product. It is anticipated that further research will be required in this area given the lack of data and established methodologies to determine the proportion of taxonomy-aligned activities funded by sovereign bonds.

General disclosure requirements

The ESAs propose that the disclosure of ‘how’ investments underlying the financial product are made in economic activities that qualify as environmentally sustainable should be in the form of a statement setting out how the activities invested in by the financial product comply with the four elements of Article 3 TR, specifically that the activity:

must contribute substantially to one or more of the environmental objectives;
does not significantly harm (DNSH) any of the environmental objectives;
is carried out in compliance with minimum safeguards in Article 18; and
comply with the technical screening criteria established by the EU.

Other proposed changes

The consultation proposes further changes to the presentation of information across pre-contractual, periodic and website disclosures.

Principal Adverse Impact Disclosures

Transparency of adverse sustainability impacts statement is to be published, as per the defined Annex in the draft RTS, with the following structure:

Section titled- Principal Adverse sustainability impacts statement
The disclosure must follow a prescribed format under the following sections:
- Summary
- Description of principal adverse sustainability impacts
  - Name of the FMP;
  - Statement of fact that the PAI on sustainability factored are considered;
  - Reference period of the statement; and
  - Summary of the PAI (maximum 2 sides A4 paper)
- Description of policies to identify and prioritise principal adverse sustainability impacts;
- Engagement policies; and
- References to international standards.

Pre-contractual disclosures

In respect of financial products that meet Article 8 or 9 SFDR respectively, the following structure of information is recommended in pre-contractual disclosures:

Article 8 SFDR

Article 9 SFDR

· What environmental and/or social characteristics are promoted by this financial product?

· What investment strategy does this financial product follow?

· What is the asset allocation planned for this financial product?

· For a financial product which includes sustainable investments, to which objectives do the sustainable investments contribute to and how do they not cause significant harm?

· Does this financial product take into account principal adverse impacts on sustainability factors?

· Where an index is designated as a reference benchmark is referenced to determine whether the financial product is aligned with the environmental and /social characteristics it promoted?

· Can more product specific information be found online?

· What is the sustainable investment objective of this financial product?

· What investment strategy does this financial product follow?

· What is the asset allocation planned for this financial product?

· To which objectives do the sustainable investments contribute to and how do they not cause significant harm?

· Does this financial product take into account principal adverse impacts on sustainability factors?

· Is a specific index designated as a reference benchmark to meet the sustainable investment objective?

· Does the financial product have the objective of a reduction in carbon emissions?

· Can more product specific information be found online?

Website disclosures

In respect of financial products that meet Article 8 or 9 SFDR respectively, the following structure of information is recommended across websites:

Article 8 SFDR

Article 9 SFDR

· Summary

· No Sustainable investment objective

· Environmental or Social characteristic of the financial product

· Investment Strategy

· Proportion of investments

· Monitoring of environmental or social characteristics

· Methodologies

· Data sources and processing

· Limitations to methodologies and data

· Due diligence

· Engagement policies

· Where an index is designated as a benchmark index

· Article 5-6 TR products that invest in taxonomy-aligned investments are exempted from website disclosures on contribution and DNSH for sustainable investments;

· Summary

· No significant harm to the sustainable objective

· Sustainable investment objective of the financial product

· Investment Strategy

· Proportion of investments

· Monitoring of sustainable investment objective

· Methodologies

· Data sources and processing

· Limitations to methodologies and data

· Due diligence

· Engagement policies

· Attainment of the sustainable investment objective

Product Disclosure in Periodic Reports

In respect of financial products that meet Article 8 or 9 SFDR respectively, the following structure of information is recommended across periodic reports:

Article 8 SFDR

Article 9 SFDR

· To what extent were the environmental and/or social characteristics promoted by this financial product met?

· What were the top investments of this financial product?

· What was the proportion of sustainability-related investments?

· For a financial product which included a commitment to make sustainable investments, ‘To which objectives do the sustainable investments contribute to and how do they not cause significant harm?’

· What actions have been taken to meet the environmental and/or social characteristics during the reference period?

· For a financial product that designated an index as a reference benchmark to attain the environmental or social characteristics promoted by the financial product, ‘How did this financial product perform compared to the designated reference benchmark?’

· To what extent was the sustainable investment objective of this financial product met?

· What were the top investments of this financial product?

· What was the proportion of sustainability-related investments?

· To which objectives do the sustainable investments contribute to and how do they not cause significant harm?

· What actions have been taken to attain the sustainable investment objective during the reference period?

· How did this financial product perform compared to the referenced sustainable benchmark?

· For a financial product referred to in Article 9(3) SFDR, how was the objective of a reduction in carbon emissions aligned with the Paris Agreement?

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