Application of the EU Taxonomy for Financial Institutions

The EU taxonomy regulation for the objective assessment of the sustainability of economic activities considers different circumstances and obligations for different economic actors. It is divided into the following three groups:

  1. Companies (over 500 employees) that fall under the non-financial reporting directive (NFRD)

  2. Financial market participant, including occupational pension providers, that offer and distribute financial products in the EU (including those from outside the EU)

  3. EU and its member states when setting public measures, standards or labels for green financial products or (corporate) bonds


Here you find our overview of the EU taxonomy

Here you find our implementation timeline of the EU taxonomy


Executive summary for financial market participants:

  • The requirements differ for financial market participants and companies that do not offer financial products

  • Some companies/financial market participants can fall into both categories (depending on size and economic activity)

  • All financial market participants offering financial products including occupational pensions in the EU must disclose how and to what extent their economic activity includes, promotes or finances sustainable projects according to criteria of the EU taxonomy

  • For each relevant product, the following must be disclosed:
    • How and to what extent the taxonomy has been applied in determining the sustainability of the underlying investments

    • To which environmental objective(s) the investments contribute

    • The share of sustainable investments expressed as a percentage of the investment, fund or portfolio based on the criteria of the EU taxonomy

    • When indicating the shares, a distinction should be made between transition activities and enabling activities

  • The information must be provided within the framework of the existing pre-contractual periodic contribution obligation

  • If for specific reasons the financial product is not subject to the EU taxonomy regulation, this should be indicated in a disclaimer

The EU taxonomy applies to all financial products offered by private and public institutions based on equity and debt capital within the EU. The following descriptions, examples and details are intended to illustrate and explain various application cases.

What must be reported according to the EU taxonomy?

Investors must provide the following information for their investments:

  • To which environmental objective(s) does the investment contribute

  • The proportion of the underlying investment that is taxonomy compliant (expressed as a percentage), specified in transition and enabling activities

  • The EU recommends that this calculation is displayed separately for each environmental objective (from the end of 2021 for climate change mitigation and adaptation and from 2022 also for the remaining four environmental objectives). Doing so, investors should take into account the different calculation bases for the two environmental targets already published (explained here in our application guide for companies)


Additional information:

The EU taxonomy requires information on how and to what extent (in percent) the investments are invested in sustainable projects. For general disclosures (i.e. not seeking specific accreditation or labelling), there is no "correct" percentage of taxonomy-compliant securities in a fund. Nonetheless, investors may wish to explain elements of their investment strategy in a description, especially for low percentages. This may include the following:

  • Products that target companies whose performance is low but will improve over time should describe the methods used to identify and include companies, as well as the expected timeframe for that improvement

  • For products that use a different methodology to determine environmental performance, the EU considers it best practice to explain the strategy, its environmental objective(s) and the main points of deviation from the taxonomy

  • The investor can also explain how he/she considers criteria such as taxonomy-compliant CapEx in its sustainability assessment

  • Investors who engage external fund managers can disclose details of how they apply the taxonomy when working with these external managers


Which financial products are covered by the EU taxonomy regulation?

In general, taxonomy reporting is required for all financial products offered and distributed in the EU (including fixed income products). Individual financial instruments, such as bonds, are not directly included in the taxonomy regulation. Below you will find a general overview of which financial products fall under the EU taxonomy:

Market segment
Covered by EU taxonomy regulation
Pensions and Asset Management

UCITS funds:

  • equity funds

  • exchange-traded funds (ETFs)

  • bond funds

Alternative Investment Funds (AIFs):

  • fund of funds

  • real estate funds

  • private equity or SME loan funds

  • venture capital funds

  • infrastructure funds

Portfolio management (under Article 4(1) of MiFID II)

Pensions:

  • pension products

  • pension schemes (defined with reference to IORP II)

  • pan-European personal pension products

Insurances

Insurance-based investment products (IBIPs)

Corporate & Investment Banking

Securitisation funds

Venture capital and private equity funds

Portfolio management

Index funds


Equity portfolio example:

An example calculation for an equity portfolio with differently shares in three companies can look as following:

Company A

Company B

Company C

Taxonomy-aligned percentage

12 %

8 %

15 %

Portfolio share

30 %

50 %

20 %

The equity fund is 10.6 % taxonomy-aligned


How and where should the taxonomy figures be disclosed?

The EU taxonomy requires financial market participants to publish taxonomy compliance as part of existing pre-contractual and periodic reporting obligations and subsequently on their websites. Some examples can be found in the table below:

Market segment
Examples
Pre-contractual
Periodic reporting

Pension and Asset Management

Occupational pension providers (IORPs)

Information to prospective members (Article 41, IORP II Directive)

Annual report (Article 29, IORP II)

Occupational pension providers (IORPs)

Prospectus (Article 69, UCITS Directive)

Annual report (Article 69, UCITS Directive)

Alternative Investment Fund Managers (AIFMs)

Disclosure to investors (Article 23(1), AIFMD)

Annual report (Article 22, AIFMD)

Investment firms providing portfolio management or investment advice (MiFID II)

Information to clients (Article 24(4) of MiFID II)

Periodic report (Article 25(6) of MiFID II)

Insurances

Insurance undertakings

Information for policy holders (Article 185(2), Solvency II) or, where relevant, for customers (Article 29(1), Insurance Distribution Directive)

Annually in writing (in accordance with Article 185(6) of Solvency II)

Corporate & Investment Banking

Credit institutions providing portfolio management or investment advice (MiFID II)

Information to clients (Article 24(4) of MiFID II)

Periodic report (Article 25(6) of MiFID II)


Pre-contractual disclosures should focus on ex-ante information, including but not limited to:

  • Environmental objectives of the fund, including any taxonomy-related objectives (e.g. 20% of the fund invested in companies with taxonomy-aligned turnover of more than 50% or with significant taxonomy-aligned capital expenditure)

  • Application of the taxonomy to achieve these objectives (e.g. in portfolio construction or as a basis for engagement with companies


Periodic reporting should focus on ex-post information, including but not limited to:

  • Implementation of the strategies in practice

  • A cut-off date calculation of the taxonomy percentage


Handling of insufficient information:

In some cases, not all information is available, which makes it difficult to assess compliance with the taxonomy. The EU is aware of this problem and recommends that investors follow the following five-step approach in such cases:

  1. Identify the activities carried out by the company, financial product issuer or covered by the financial product (e.g. projects, use of profits). Classify them according to the taxonomy and the corresponding environmental objective(s)

  2. Check for each activity whether the company or financial product issuer meets the relevant technical selection criteria - e.g., emissions from electricity generation <100 g CO2e/kWh

  3. Verify that the “do no significant harm” (DNSH) criteria are met by the issuer. Investors would likely use a due diligence-like process to review the performance of the underlying holdings to apply the taxonomy and rely on the legal disclosures on the suitability of those holdings

  4. Conduct due diligence to avoid breach of the minimum social guarantees set in the taxonomy directive Article 13

  5. Calculate the compliance of investments with the taxonomy and prepare the disclosure on project level




Sources:

https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/

documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf

https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en

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