Taxonomy updates on SFDR RTS

Taxonomy updates on SFDR RTS
The final report on the SFDR Draft RTS, updated by Taxonomy related product disclosures, is out!

The ESAs have published their final report on the SFDR Draft RTS on October 22nd, including additional guidelines regarding taxonomy alignment disclosures and aggregations.

The new Draft RTS requires Financial Market Participants (FMPs) to provide in their periodic product reports a multi-faceted breakdown analysis regarding the proportion of taxonomy alignment, such as:

  • Portfolio weighting according to all three KPIs specified in Article 8(2) of the Taxonomy Regulation (Turnover, CapEx, OpEx) should be disclosed.
  • Two different calculations of each of the KPIs, including and excluding sovereign-debt, in the wake of absent reliable methodology for sovereign-debt alignment.
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  • Proportion of Enabling and Transitional activities out of total portfolio.
  • Environmental objectives, which the investments contribute to.

In the Pre-Contractual report, the new draft RTS specifies that only one KPI should be disclosed as a minimum commitment, with Turnover weighting as a default. However, CapEx /OpEx are allowed to be used when justified. Consistency regarding the KPI selection is required such that a uniform KPI should be used for each group of non-financial and financial undertakings (asset managers, credit institutions, etc.).

As for the KPIs calculations, the updated Draft RTS also specifies the contribution to taxonomy alignment (to be considered in the numerator) of different asset-types:

  • Equities and Bonds of investee companies: as the value corresponds to the share of investee companies that are taxonomy aligned, weighted by Turnover as default or CapEx/OpEx when justified.
  • Green bonds under the EU Green Bond Standard: as 100% of their value, since such bonds must use 100% of their proceeds towards environmentally sustainable economic activities.
  • Other green bonds: as the proportion of their proceeds that is used to finance environmentally sustainable economic activities.
  • Real Estate/Infrastructure: as the market value of such investments which qualify as taxonomy aligned.
  • Securitization positions: as the market value of the underlying exposures which are taxonomy aligned.
  • Financial products under the Articles 5/6 of the Taxonomy regulation: as the market value of the proportion of the investments in taxonomy alignments activities.

Derivatives are excluded at this stage from the calculations, due to the lack of reliable methodology to determine taxonomy alignment exposures. The positions should be netted according to article 3(4) and article 3(5) of the Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps.

Interestingly, the ESAs stated that while FMPs should use official investee company’s reports to determine whether an activity is aligned with the taxonomy, they can also rely on 3rd party data providers and information gathered directly from the investee companies in case such information is not available publicly. This lies in contrast to what is stated in the draft delegated act on article 8 of the Taxonomy Regulation (disclosure of undertakings in non-financial statements), which constrains FMPs to use official non-financial reporting of companies as the only source to determine the taxonomy alignment of their investments.

The ESAs also withdrew their proposal from the Join Consultation Paper (published in March this year), regarding the derogation of Do No Significant Harm (DNSH) analysis for sustainable investment when they are taxonomy aligned (and thus follow DNSH criteria from the Taxonomy Regulation). Whereas the ESAs clearly stated that they believe how inclusion of the SFDR DNSH analysis for taxonomy aligned investments will adversely impact such investments, they also mentioned that due to legal constrains, it cannot be derogated. As such, Principal Adverse Impacts (PAIs) should be considered for all sustainable investments.

The timelines, as of now, haven’t changed, which leaves some open questions regarding the availability of accurate data required in order to report taxonomy alignment for beginning of 2022. The timeline of application of the RTS holds for July 2022 and the next steps involve the EU Commission publishing the RTS, after which the EU Parliament and EU Council would have three months to analyze it. We will keep you posted on such developments.

Still, it is clear that the amount of KPIs required, in combination with qualitative information, requires a proper methodology and a data & content management system to be in place, in order to ensure compliance and that reporting requirements are met.

Do not hesitate to reach out to us to discuss how this can be achieved!
Daniel Heinisch

Product Manager

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