EU supervisors publish final proposal for taxonomy disclosures under sustainable finance reporting rules

Long-awaited proposal suggests ‘dual approach’ to deal with complexities around sovereign bonds

Europe’s three financial supervisory authorities (ESAs) published on Friday draft rules for how investors should make EU Taxonomy-related product disclosures under its new anti-greenwashing rules.  

The planned Regulatory Technical Standards (RTS) cover how, and to what extent, economic activities in which financial products invest “qualify as environmentally sustainable under the Taxonomy Regulation”. The standards are part of the Sustainable Finance Disclosure Regulation (SFDR) that investors are required to comply with to discourage opaque or exaggerated claims about the sustainability credentials of investment strategies. 

Their long-awaited publication comes after the ESAs missed the original June deadline to submit the rules to the European Commission. 

All SFDR rules will be bundled into a single rulebook, set to be implemented by 1 July 2022. However, disclosure requirements already in place require investors covered by the SFDR to report the alignment of their investments with the EU Taxonomy’s climate rules by 1 January – making the delay to the Taxonomy RTS a major source of frustration in the market. 

RI reported recently that the RTS was expected imminently, and that financial regulation lawyers said the 1 January deadline was “practically impossible”.  

The final RTS proposal provides clarity on a number of sticking points around taxonomy disclosures under the SFDR.  

A key issue revolves around whether sovereign bonds should be included in investors’ taxonomy-alignment calculation. The asset class suffers from a “lack of reliable methodology to derive taxonomy-aligned activities funded by sovereign exposures”, the ESAs acknowledge, suggesting a dual approach to the calculation: one including all investments and one excluding sovereign bond exposures.  

Another change from an earlier consultation paper on taxonomy-related disclosures relates to the reporting of Do No Significant Harm (DNSH) criteria – broadly meaning investments contributing to a sustainable objective cannot cause harm to another. These criteria exist both under the SFDR and Taxonomy regulation, but are notably different – the Taxonomy criteria apply on an activity level are more detailed and, for now, are only in place for the regulation’s climate objectives, while the SFDR criteria are broader and linked to the Principle Adverse Impact (PAI) rules in the regulation.  

The ESAs had proposed to exempt Taxonomy-aligned investments from reporting against the DNSH criteria under the SFDR regulation, because the Taxonomy regulation already requires such disclosures, but they have changed their plans “as a result of legal analysis”. Investors will now need to comply with SFDR DNSH for all sustainable investments, including those that are Taxonomy-aligned. In a statement that will be seen to adding to criticisms that the EU’s sustainable finance regulations are sometimes both overlapping and incompatible, the ESAs said they regret this “as they believe this will adversely affect taxonomy-aligned investments”.  

In addition, the planned rules would require investors to indicate whether they will have their taxonomy-based disclosures assured or independently reviewed.  

The Commission is expected to endorse the RTS within three months, said ESMA. The rules will also need to be approved by the European Parliament and Council of member states.