Trade associations for banks, fund managers and industry have raised concerns over key elements of the EU’s proposed taxonomy disclosure rules as a consultation on the topic enters its final day.
Stakeholders were particularly critical about a provision which prevents banks and other financial companies from considering the taxonomy-alignment of smaller and private companies when reporting the overall alignment of their balance sheet with the taxonomy. According to the proposed disclosure regime, financial institutions will only report lending and investments to large, listed companies in the EU which are covered under the scope of the Non-Financial Reporting Directive (NFRD) – due to expand under a new proposed Corporate Sustainability Reporting Directive.
This would be “counterproductive”, the Association of the Luxembourg Fund Industry (ALFI) has argued. It gave the example of two companies in the same sector – a small company with 90% alignment to the taxonomy and a large company with 5% alignment – noting that under the proposed rules, an investment in the first company would not be considered at all aligned to the taxonomy while an investment in the second company would be considered partly aligned.
Instead, financial institutions should be required to disclose the alignment of their total assets, including exposures to non-EU, small and private companies which are not covered by the NFRD, said the European Banking Federation (EBF) in its submission.
Stakeholder feedback also centred on the implementation of the new rules which would see companies and financial institutions begin reporting their taxonomy performance at the same time in 2022. Wholesale fund body the Association for Financial Markets in Europe (AFME), EBF and ALFI have all called for a year’s reprieve for financial institutions, citing their reliance on corporate-level disclosures.
Under the draft proposals, “credit institutions will have to prepare disclosures on their Taxonomy-alignment using information that companies have not reported yet”, AFME said. “In addition to adding operational challenges, this has negative effects for the quality, comparability, and reliability of disclosures.”
Separately, multiple submissions to the EU were concerned about the feasibility of the disclosure rules, describing them as overly granular and prescriptive. According to an AFME estimate, complying with rules could easily require access to more than a million data points. In addition, European energy trade body IFIEC and French oil company Engie warned that the rules exceeded the legal requirements for taxonomy disclosures which had been agreed upon earlier by the EU, and could undermine the bloc's competitiveness by exposing commercially sensitive information.
In other taxonomy-related news, a number of NGOs that in April suspended their involvement in the EU’s Platform on Sustainable Finance – a group of experts advising the EU on the taxonomy rules – have rejoined, including representatives from BirdLife, ECOS and WWF.
The NGO members temporarily quit the platform after raising concerns for example about the criteria for forestry and bioenergy in the 21 April publication by the Commission on what will be defined as climate-aligned under the Taxonomy.
They have now decided to take part again following efforts by the European Commission to clarify what platform members can and cannot do, and make sure they have more of a say on Commission proposals.
The European Commission in late May wrote to the platform clarifying its members will be allowed to comment on draft proposals when they are published by the Commission, RI understands.
In addition, the Commission has said that it will accompany its delegated acts with a document explaining how its decisions align with scientific advice, including when they do not follow the platform’s recommendations, which has been welcomed by the NGOs.
“We believe that, if followed, these steps will greatly improve the transparency and accountability of the decision-making process,” said Ariel Brunner, Senior Head of Policy of BirdLife Europe and Central Asia. “It will also provide a clarity of roles; while the Commission is entitled to not follow the advice of experts, they cannot use experts as cover for decisions that do not align with their advice.”