Quo vadis Art 8 Taxonomy Regulation? – the EU provides signposts
The European Commission published the final version of the FAQs regarding the Disclosures Delegated Act under Article 8 of the EU Taxonomy Regulation (Regulation (EU) 2021/2178) in early October 2022.
Already in December 2021, the European Commission published 22 FAQs regarding the reporting obligations of financial and non-financial companies according to the Disclosures Delegated Act under Article 8 of the EU Taxonomy Regulation. The 33 questions and answers ("FAQs") recently published in October 2022 are intended to amend these and serve as additional signposts and interpretation aids for companies. The final interpretation itself remains reserved for the Court of Justice of the European Union as competent authority to interpret Union law.
These FAQs are broken down as follows:
- General FAQs
- Non-Financial Undertakings
- Financial Undertakings
- Asset Manager
- Credit Institution
- Debt Market
- Interaction with other Regulations
Taxonomy-eligible economic activity
The FAQs explain, among other things, what is meant by "Taxonomy-eligible economic activity". Taxonomy-eligible economic activities are those activities that are already included in one of the delegated acts to the Taxonomy Regulation. If the activity is not (yet) included in any of the delegated legal acts, it cannot be regarded as Taxonomy-eligible. However, the taxonomy itself is described in the FAQs as "a dynamic framework that should expand its scope of activities overtime", meaning that the eligible activities continuously expand accordingly.
Weighing the assets (asset managers)
The FAQs also address how asset managers can weight their holdings in a portfolio to report Taxonomy-eligible assets. Here, the taxonomy eligibility reporting is weighted by the value of the risk positions in the asset manager's total assets. In simple terms, therefore, an asset manager has equal exposure to two assets, one 100% Taxonomy-eligible and the other 0% Taxonomy-eligible, resulting in a 50% taxonomy-eligibility in all assets.
Taxonomy-eligibility of debt assets
To assess the taxonomy eligibility of debt instruments, such as a bond or a loan, it is recommended to use the Taxonomy-eligible value of the underlying company (turnover and CapEx). However, only that part of the proceeds of the debt instrument that can also be allocated to Taxonomy-eligible activities is Taxonomy-eligible itself. Therefore, if only 50% of the proceeds of the debt instrument are Taxonomy-eligible, the Taxonomy-eligibility turnover and CapEx value of the debt instrument must also be recognized at 50%.
Interaction with the CSRD
The Disclosures Delegated Act and the proposed directive on sustainability reporting (CSRD) are intended to complement each other. The CSRD extends the scope of the current reporting requirements to all large listed and non-listed companies and all listed SMEs, except micro-entities. The information under the Disclosures Delegated Act should be reported in the same management report at company level, alongside other sustainability related information required under the CSRD provisions as proposed.
Further questions and answers
Further questions answered by the FAQs (not conclusive):
- How should a credit institution with a Markets in Financial Instruments Directive (MifiD) investment firm license report its Taxonomy-eligible economic activities?
- Can green debt instruments from non-EU entities be reported as Taxonomy-eligible?
- Can green sovereign debt be reported as Taxonomy-eligible?
- What should financial undertakings report if underlying entities’ information is not publicly available?
Read the FAQs here