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    EC Seeks Views for CDR on Non-Financial Sustainability Disclosures

    July 28, 2020

    EC is seeking feedback for an initiative that would involve the development of a Commission Delegated Regulation (or CDR) on the sustainable taxonomy-related disclosures by undertakings reporting non-financial information. The objective of this initiative is to specify an appropriate set of rules for undertakings subject to the Non-Financial Reporting Directive (NFRD) to include in their non-financial statements, consolidated non-financial statements, or other relevant separate reports, information on how and to what extent their operations are associated with economic activities that qualify as environmentally sustainable under the EU Taxonomy. The feedback period on this initiative ends on September 08, 2020. EC plans to adopt the Delegated Regulation by the second quarter of 2021.

    The EU recently adopted the Taxonomy Regulation on the establishment of a framework that creates a classification system of environmentally sustainable economic activities (that is, EU taxonomy) to facilitate sustainable investment. The initiative for which EC is seeking feedback now complements the Taxonomy Regulation with a delegated act specifying the requirements for entities subject to NFRD to publish information on how and to what extent their activities are associated with the EU taxonomy; these entities that are subject to NFRD include large listed undertakings, large banks, and large insurance undertakings with more than 500 employees. The delegated act is distinct from two other delegated acts under the Taxonomy Regulation that set technical screening criteria for six environmental objectives and are to be adopted by December 31, 2020 and December 31, 2021. This delegated act will complement the ongoing revision of the NFRD and development of regulatory technical standards by ESAs under the regulation on sustainability-related disclosures in the financial services sector (that is, Disclosure Regulation). Together, these initiatives will interact to help undertakings, financial intermediaries, and end-investors enhance capital flows toward environmentally sustainable projects and activities in a consistent manner.

    The initiative, to which EC is now seeking feedback, will propose methodologies and indicators to help undertakings determine the extent to which their economic activities can be considered environmentally sustainable according to the EU taxonomy. More transparency about how undertakings’ activities are related to the EU taxonomy is necessary for financial market participants to design financial products and portfolios based on this information. Without this clarity, financial intermediaries and investors would not have a commonly accepted way of determining when an undertaking is truly green or making investments in that direction. This could result in some crucial data gaps that could hinder financing those activities considered to make a substantial contribution to the environmental objectives of EU. This represents an obstacle and source of additional costs not only for investors and financial market participants, but also for businesses that want to reorient their economic activities in line with sustainability objectives and attract capital from prospective green investors. Additionally, creating consistency for undertakings to assess their degree of alignment with the EU taxonomy would help improve coherence between the NFRD, Taxonomy Regulation, and Disclosure Regulation; enhance consistency of information disclosed by undertakings; and limit administrative burden on them.

    The Taxonomy Regulation already specifies that non-financial undertakings under the NFRD are legally obliged to disclose the proportion of their turnover derived from products or services associated with environmentally sustainable economic activities. The undertakings are also obliged to disclose the proportion of their total investments (CapEx) and expenditures (OpEx) related to assets or processes associated with environmentally sustainable economic activities. Through this exercise, it will be examined whether these indicators for non-financial undertakings under the NFRD should be further specified and whether different indicators for financial undertakings under the NFRD (that is, large banks and insurance companies) should be developed for that purpose. Based on the results of the analysis, the appropriate indicators would be set out in the delegated act, along with a methodology that would help undertakings to disclose information according to those indicators. In furtherance to this delegated act, if deemed necessary, additional EC guidance on the application and use of the disclosure requirements for companies according to the EU taxonomy may be considered.


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    Comment Due Date: September 08, 2020

    Effective Date: June 2021 (planned)

    Keywords: Europe, EU, Banking, Insurance, ESG, Climate Change Risk, Sustainable Finance, Taxonomy Regulation, Disclosures, NFRD, Delegated Act, EC

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