In its report on the data and usability of the EU Taxonomy, the EU Platform on Sustainable Finance has, based on data collected from reporting companies and the expert group’s market insight, identified crucial issues with regard to the practical usability and interpretation of the existing EU Taxonomy Delegated Acts. Usability issues discussed within the report can be grouped under the following five broad categories:
- Misalignment, between the sustainable finance reporting requirements across the regulatory framework, including differing definitions
- Sequencing issues across the reporting framework, ensuring that the data is available to financial institutions in order to satisfy their own reporting obligations
- Regulatory overload, ensuring that the regulatory reporting requirements are evenly distributed and proportional
- Interpretive issues, ensuring reporting requirements are clearly understood by all user groups (what needs to be reported, how and by when)
- Regulatory and data gaps, filling any regulatory gap or addressing any regulatory hurdle that might hinder the use of the Taxonomy and fostering the availability and accessibility of data.
Gaps identified in Taxonomy reporting
The Platform states that there are around 2,000 companies in the scope of the Non-financial Reporting Directive (NFRD), which thus are also expected to report on the Taxonomy. Based on data aggregated by Bloomberg, the main gaps identified were companies not reporting across all three indicators – turnover, Capex and Opex – and a lack of consistency between reporting in absolute and percentage terms.
The Platform further identified that reporting entities often:
- use incorrect templates, number formatting (ranges) and naming conventions (green share of revenues as opposed to taxonomy-aligned turnover),
- incorrectly apply reporting metrics (for example on alignment of Opex) and
- have interpretative issues on what constitutes an eligible activity.
Recommendations for reporting on the Taxonomy
Climate Delegated Act
The Platform recommends clarifying imprecise language in the technical screening criteria and defines various steps for better alignment between pieces of legislation, such as the Taxonomy and the CSRD, including updated mapping tables between the two frameworks. The Platform also recommends strengthening technical guidance across various activities, including manufacturing of renewable energy equipment and R&D.
Timeline for adoption of the remaining four objectives
It is further recommended that companies are given a 12-month period to adapt to new criteria published for the remaining four environmental objectives. Furthermore the Platform recommends and suggests forms of harmonising annexes to ensure consistent reporting across different types of reporting entities.
Treatment of corporate green bonds
- Grandfathering: One of the discussion topics surrounding the European Green Bond Standard refers to whether an already issued bond can still be labelled as such in the case of an update of the Taxonomy. In current discussions, the Council opts for full grandfathering, meaning that a bond can remain a European Green Bond until maturity, under the Taxonomy criteria at its issuance. The Parliament proposes a 5 -year grandfathering period, while the Platform is aligned with the Council by recommending full grandfathering, given that a potential downgrade due to new Taxonomy criteria is outside of the issuer’s control. For transitional activities, the Platform recommends a grandfathering period of 10 years.
- Existing green bonds: The Platform recommends that financial market participants use “equivalent information,” or estimates, when assessing the Taxonomy alignment of existing bonds issued under different standards.
- Complex green debt: Debt, including complex projects such as large infrastructure or real estate projects, can span various economic activities and even more DNSH criteria. The Platform therefore recommends that the Commission develop a practical methodology to assess these activities’ Taxonomy alignment in a more streamlined manner.
Assessments of mortgages for credit institutions
Under the section surrounding assessment of mortgages, the Platform makes recommendations which could be seen as equally valid for the general assessment of real estate assets. The Platform recommends that the Commission review and strengthen both EPC and NZEB requirements across Europe and make the registries available to lenders, investors and certifying bodies. Until the EPC framework has been strengthened, the Platform recommends allowing the use of existing green building certifications as proxies for the assessment of mortgages.
The report provided much needed clarity and guidance for industry and other stakeholders on verification, covering:
- What information disclosed as a part of Taxonomy reporting is subject to external verification and/or assurance.
- The roles and responsibilities of different parties with regard to the verification or assurance of information used within Taxonomy reporting.
- The implementation of verification and the level of assurance required.
The Climate Delegated Act details where compliance with the Technical Screening Criteria needs to be verified and for which activities. For the majority of activities, verification requirements cover both quantitative and qualitative information on methodologies and calculations of greenhouse gas (GHG) emissions. An independent third party will be required to verify quantified life cycle GHG emissions, including verification of how the reporting entity’s activity performed against a threshold.
Importantly, the report specifically highlights that “qualitative information contextualises and explains quantitative performance data, and therefore, its verification is important to ensure overall consistency.”
With regard to forward-looking data, it is specifically noted that “reasonable assurance” provides assurance that “such information has been prepared in accordance with applicable standards.” It is recommended that the most efficient way of achieving this threshold is to use of science-based and transparent methodologies when compiling forward-looking data and targets.
Assurance of use-of-proceeds debt instruments
Although the report gives recommendations relating to potential verification requirements for use-of-proceeds debt instruments, they are given under the caveat that “the issuance of financial instruments per se does not entail or reference Taxonomy-related reporting.” Despite this caveat, it is recognised that demand for Taxonomy-aligned instruments will play an increasingly important role in the financing and achievement of transition and net-zero ambitions.
The Platform recommends that the European Commission require issuers of green bonds and similar use-of-proceeds financial instruments to:
- report against the EU Taxonomy
- obtain third-party verification for allocation and impact reports; and,
- ensure that the verifier is registered and supervised by ESMA or an official authority for non-EU issuances.
Sustainable Finance Regulatory Framework
The final section of the report deals with the coherence between interlinked European sustainable finance regulation, such as the CSRD, SFDR and MiFID II. The main recommendation targets the exclusion of the requirement for investors to calculate Taxonomy-alignment of their portfolios using Opex, as the metric is difficult to find and adds little value for end-investors.
CSRD: With regards to the CSRD, the European Commission, in tandem with the new Platform 2.0, should ensure alignment between the Taxonomy, the CSRD and the European Sustainability Reporting Standards (ESRS). This refers to terminology, sustainability indicators and their calculation method as well as human rights and corporate governance criteria defined in the Minimum Social Safeguards.
SFDR: Recommendations tackle the alignment of metrics used in the Taxonomy and SFDR, as well as aligning social and governance Principle Adverse Impacts (PAIs) with the Taxonomy minimum safeguards and environmental PAIs with DNSH criteria. Furthermore, it is proposed to include a list of always significantly harmful activities.