EC is requesting feedback on the proposed Commission Delegated Regulation on the content, methodology, and presentation of information that large financial and non-financial undertakings should disclose about their environmentally sustainable economic activities under the Taxonomy Regulation. EC also published the frequently asked questions related to the draft regulation. The feedback period is open until June 04, 2021. The final regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
Article 8 of the Taxonomy Regulation aims to increase transparency in the market and help prevent greenwashing by providing information to investors about the environmental performance of assets and economic activities of financial and non-financial undertakings. Article 8(1) of the Taxonomy Regulation provides that certain large undertakings that are required to publish non-financial information under the Non-Financial Reporting Directive (NFRD) should disclose information to public on how and to what extent their activities are associated with environmentally sustainable economic activities as defined under the EU Taxonomy legislation. Article 8(2) specifies the key performance indicators (KPIs) related to turnover, capital expenditure, and operational expenditure that non-financial undertakings must disclose. Additionally, Article 8(4) of the Taxonomy Regulation requires EC to adopt a delegated act to specify the content, methodology, and presentation of information to be disclosed by both non-financial and financial undertakings by June 2021. In this context, the draft regulation:
- specifies the content and presentation of the information that non-financial undertakings, asset managers, credit institutions, investment firms, and insurance and reinsurance undertakings should disclose under Article 8 of the Taxonomy Regulation.
- sets out common rules about the scope of disclosures and the calculation of KPIs with respect to the exposures to non-financial undertakings that are not covered by the scope of NFRD and are not required to disclose information under the Delegated Act.
- sets out common rules for the disclosures of non-financial and financial undertakings concerning the location of disclosures, comparative information, and the currency for calculating the KPIs.
The main KPIs for financial companies (banks, investment firms, asset managers, insurers/reinsurers) relate to the proportion of taxonomy-aligned economic activities in their financial activities, such as lending, investment and insurance. Credit institutions shall report a main KPI for on-balance sheet assets related to the financing activities (for example, lending activities) as well as KPIs for off-balance sheet assets and a KPI for commissions and fees related to other non-financing activities. Where relevant, credit institutions should also disclose information related to their trading portfolios. The main KPI for credit institutions is the Green Asset Ratio (GAR) that is defined as the proportion of the credit institutions’ assets invested in taxonomy-aligned economic activities as a share of total covered assets. The GAR should be calculated based on the on-balance sheet exposures (total covered assets) according to the prudential scope of consolidation for the types of assets. Credit institutions should disclose the aggregate GAR for on-balance sheet covered assets and provide for a breakdown for the environmental objective pursued by environmentally sustainable assets, the type of counterparty, and the subset of transitional and enabling activities.
The rules set out in the draft regulation allow companies to translate the technical screening criteria of the Climate Delegated Act (and the future Environmental Delegated Act) into quantitative economic performance indicators (KPIs) that will be publicly disclosed (for example, the percentage of environmentally sustainable economic activities in a company’s turnover or capital expenditure). This disclosure will help investors and the public to understand the companies’ trajectory toward sustainability through the annual publication of the KPIs associated with environmentally sustainable economic activities.
Comment Due Date: June 04, 2021
Effective Date: OJ+20 days
Keywords: Europe, EU, Banking, Insurance, Securities, ESG, Climate Change Risk, Sustainable Finance, Taxonomy Regulation, Disclosures, NFRD, Investment Firms, Sustainability-Related Disclosures, Green Asset Ratio, EC
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Previous ArticleJFSA Finalizes Guidelines on Climate Transition Finance
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.
As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.
The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.
The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.
The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.
The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.