Sustainable finance: Commission provides additional guidance to help financial undertakings report about environmental performance of their activities under EU taxonomy

The European Commission (EC) has published a draft Commission notice „on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act under Article 8 of the EU Taxonomy Regulation on the reporting of Taxonomy-eligible and Taxonomy-aligned economic activities and assets“. This is the third such Communication from the Commission providing further guidance on interpretation and implementation to financial companies in the form of answers to Frequently Asked Questions (FAQs) on the reporting of KPIs under the Disclosures Delegated Act (Commission Delegated Regulation (EU) 2021/2178) supplementing the EU Taxonomy Regulation. The FAQs are based on input from stakeholders subject to the reporting requirements, the Platform on Sustainable Finance and national and European supervisors.
The internal structure of the document is as follows:
#### Financial undertakings
##### 1. General questions
###### A. Scope of covered entities
1. Which KPIs should undertakings such as central counterparties (CCPs), central securities depositories (CSDs), leasing companies and payment institutions report? Should exposures to those entities be treated as exposures to financial or non-financial undertakings?
###### B. Scope of the consolidation of disclosures
2. Should reporting financial undertakings that own other financial undertakings provide their Taxonomy disclosures based on regulatory or accounting level of group consolidation? What is the level of group consolidation of the reporting entity for the purpose of the Taxonomy disclosures?
###### C. Taxonomy-assessment of exposures to individual undertakings
3. Should financial undertakings calculate two KPIs for investments or exposures, one based on the turnover KPIs and one based on CapEx KPIs of investee companies or counterparties? Or should financial undertakings combine the values from the turnover and CapEx KPIs of investee companies or counterparties into a single KPI?
4. What KPI should a financial undertaking use to assess its exposure to another financial undertaking that reports one or more KPIs? When computing exposures to an insurance or reinsurance undertaking, how should a financial undertaking combine investment and underwriting KPIs for the purpose of assessing that exposure?
5. What should financial undertakings report if counterparty entities’ KPIs are not publicly available or are inaccurate? For instance, how should financial undertakings report in their KPIs disclosed in 2024 their exposures to other counterparty financial undertakings, which will need to report their respective KPIs only as of 2024?
6. How should financial undertakings treat restatements of KPIs (i.e. corrections of KPIs already published) by their counterparties? Do financial undertakings have to recalculate and restate their KPIs from the previous year whenever their counterparties restate their respective KPIs from the previous year?
###### D. Taxonomy-assessment of groups
###### a. KPIs to be reported by parent undertakings
7. Which KPIs should be reported by parent undertakings of groups, such as financial conglomerates, that have several activities and business segments at group level such as asset management, investment firm, insurance, and banking activities?
8. How should the reporting apply for a reporting parent undertaking with multiple subsidiaries of which (i) some are subject to Articles 19a or 29a of the Accounting Directive, but make use of the exemption from reporting sustainability information, and (ii) others are not subject to Articles 19a or 29a of the Accounting Directive?
9. What KPIs should be reported by a reporting parent undertaking which has different types of non-financial and financial subsidiaries?
10. How should reporting parent undertakings adjust Taxonomy disclosures where the activities of one or more subsidiaries differ from the overall business model of the group?
###### b. Taxonomy assessment of exposures to parent undertakings
11. Which KPIs should be considered for exposures of financial undertakings to the parent undertaking of a group, such as a financial conglomerate, with subsidiaries providing insurance, banking, investment or asset management services or exposures to a subsidiary of that parent?
12. Which KPIs should be considered for exposures of financial undertakings to the parent undertaking of a mixed group with subsidiaries providing financial services, such as insurance, banking, investment or asset management services and non-financial activities?
###### E. Taxonomy-assessment of specific exposures
###### a. Exposures to entities subject to Articles 19a or 29a of the Accounting Directive
13. How should financial undertakings assess their exposures towards:
– an undertaking that is not subject to Articles 19a or 29a of the Accounting Directive on an individual basis, but which is the subsidiary of a parent undertaking that is subject to those provisions;
– a subsidiary subject to Article 19a of the Accounting Directive on an individual basis, but which is exempted from publishing sustainability reporting on grounds that its parent does so on a consolidated basis?
###### b. Exposures to Special Purpose Vehicles
14. How should exposures to special purpose vehicles (‘SPVs’) be treated? Do financial undertakings have to assess specialised lending/project financing for the purpose of Taxonomy-alignment reporting?
###### c. Public authorities
15. How should exposures of financial undertakings to regional governments and to entities controlled by States be treated?
###### d. EU undertakings and non-EU undertakings not subject to Articles 19a or 29a of the Accounting Directive
16. How should financial undertakings reflect in their KPIs exposures to EU and non-EU undertakings that are not subject to sustainability reporting in accordance with Articles 19a or 29a of the Accounting Directive?
Do bonds issued by undertakings not subject to sustainability reporting in accordance with Articles 19a or 29a of the Accounting Directive have to be issued as EuGB to be included in the numerator of the GAR (Section 1.2.1.1., point (ii), of Annex V DDA)?
How should financial instruments (loans) where the use of proceeds is known financing those undertakings be assessed?
###### e. Real estate
17. How can real estate leases be treated in the calculation of KPIs?
18. How should financial undertakings report investments in real estate assets which are not collateralised by residential property?
19. The criteria for substantial contribution to CCM in Section 7.1. (“Construction of new buildings”) and Section 7.7. (“Acquisition and ownership of buildings”) of the Climate Delegated Act refers to the nearly ezro emissions building (NZEB) criteria, which are defined at national level. When a Member State changes NZEB criteria, should financial undertakings reassess the Taxonomy-alignment of the buildings that they finance by taking into account the new NZEB criteria?
20. For the purpose of assessing the Taxonomy-alignment under Section 7.7. (“Acquisition and ownership of buildings”) of Annex I to the Climate Delegated Act, buildings built before 31 December 2020 must have at least an Energy Performance Certificate (EPC) class A label or be “within the top 15% of the national or regional building stock expressed as operational Primary Energy Demand (PED) and demonstrated by adequate evidence”. Similarly, the TSC for activity under Section 7.2. (‘Renovation of existing buildings’) of Annex I to the Climate Delegated Act, provide for two TSC for substantial contribution to CCM. Could these two criteria be used simultaneously for assessing the Taxonomy-alignment of the respective activities?
21. As regards the top 15% criterion concerning substantial contribution to CCM listed in Section 7.7. of Annex I to the Climate Delegated Act, would a conclusion that buildings built after a certain year are in the top 15% constitute an estimate which could only be used for voluntary reporting by credit institutions?
22. For the purpose of assessing Taxonomy-alignment under Section 7.7. (“Acquisition and ownership of buildings”) of Annex I to the Climate Delegated Act, if a credit institution extrapolates the known national distribution of EPC A-labels to its own mortgage portfolio in a geographic area, and does not use its own mortgage information but fully relies on external data sources with no further assurance on the external data, would this constitute
an estimate that could only be used for voluntary reporting?
23. If a credit institution assumes that buildings with an expired EPC class A which constitute collateral of residential mortgages in its portfolio are within the top 15% of the national or regional building stock expressed as operational primary energy demand (PED), would this constitute an estimate that could only be used for voluntary reporting?
24. Should a credit institution which grants a mortgage loan for the construction of a building assess the Taxonomy-alignment of this loan against the criteria in Section 7.1. (“Construction of new buildings”) or Section 7.7. (“Acquisition and ownership of buildings”) of the relevant Annex to the Climate Delegated Act?
###### f. Financial instruments (derivatives, securitisations, structured notes and covered bonds)
25. How are derivatives treated in the total GAR for the banking book and in the GAR for the trading portfolio?
26. Should derivates in the denominator of the assets under management (AuM) KPI be computed as a net position (that is, derivative assets offset by derivative liabilities, or derivatives assets only)?
27. How should the Taxonomy-alignment of instruments such as securitisations, structured notes and covered bonds be reported and assessed? How does this approach interact with the requirements for EuGB?
###### g. Exposures to specific economic activities and economic activities contributing to multiple environmental objectives
28. Do financial undertakings need to disclose all templates in Annex XII DDA where they do not carry out, fund or have exposures to activities referred to in Template 1 of that Annex?
29. What are the applicable KPIs of undertakings for which templates in Annex XII DDA should be provided?
30. How should financial undertakings compute the information pursuant to Annex XII DDA where their counterparties carry out, fund or are exposed to the activities referred to in that Annex?
31. How should financial undertakings compute the breakdowns of their KPIs per environmental objectives?
###### F. Verification/assurance/evidence of compliance with the TSC
32. Which input data and KPIs for which no externally reported information is available should be used for assessing the exposures of financial undertakings?
33. In cases of financing where the use of proceeds is known, should a financial undertaking be expected to review all the documents attesting compliance with the TSC or should it accept the assessment of that compliance, including verification or assurance, submitted by the counterparty?
34. Do financial undertakings need to annually review the Taxonomy-alignment of their exposures?
35. Where a credit institution offers, to a non-financial undertaking subject to Articles 19a or 29a of the Accounting Directive, a loan with a purpose of financing a project that is planned to be compliant with the TSC, can the credit institution rely on information gathered from that counterparty specifically related to that project, regardless of the counterparty’s overall Taxonomy disclosures?
36. In the case of retail clients, can credit institutions verify compliance with the TSC, in particular DNSH for adaptation, using specific evidence, e.g. domestic certifications or information in EPC)?
###### G. Compliance with minimum safeguards
37. Do financial undertakings have to comply with minimum safeguards in conducting their activities or is compliance with minimum safeguards only relevant at the level of the investee company?
38. Where an insurance or a reinsurance undertaking computes the underwriting KPI, should procedures relevant for compliance with minimum safeguards be applied by the undertaking at the level of its policyholders, in addition to its own compliance with those safeguards?
##### 2. Questions related to specific financial undertakings
###### A. Credit institutions
###### a. Entities covered
39. How should the Disclosures Delegated Act be applied by institutions that are excluded from the application of the CRD but which fall under the scope of Articles 19a or 29a of the Accounting Directive? Which templates should be used in such cases for reporting?
40. What is the threshold for a credit institution to be deemed to have a business model based “to a great extent on the financing of public housing” (Section 1.2.1.4. of Annex V DDA)?
###### b. Scope of KPIs
41. Where a financial undertaking delegates portfolio management of assets to another financial undertaking, which financial undertaking includes such assets in the calculation of the KPI?
42. Are assets pertaining to the credit institution’s portfolio management function, such as wealth management activities, included in the green ratio for assets under management (AuM) KPI?
43. Fo the asset under management (AuM) KPI, who is responsible for assessing Taxonomyalignment of a UCITS or AIF? Can credit institutions source the information from the asset manager or is the credit institution expected to do so?
44. Should repurchase agreement (repo) contracts be treated as “loans and advances” for EU Taxonomy purposes? In particular, can the alignment be assessed by inferring it from the counterparty’s KPI, or by verifying compliance with the TSC of the underlying economic activity?
45. In which GAR KPI should credit institutions assess exposures from the underwriting of financial instruments on a firm commitment basis?
46. What inputs are to be used for computing turnover based GAR and CapEx based GAR?
###### c. Reporting of specific exposures
47. How should credit institutions report exposures to public authorities (e.g. local governments) not related to public housing or project finance in the GAR? How should credit institutions report their exposures to regional governments?
48. How should credit institutions treat cash deposits held at central banks?
49. Should collateralised loans for renovation be reported as loans collateralised by residential immovable property or as building renovation loans in the GAR template?
50. How should Taxonomy-alignment be disclosed for mortgage and motor vehicle loans when relevant data is not available?
51. For the purposes of the GAR for retail exposures, can mortgages be Taxonomy-eligible irrespective of whether they are located in the EU? Do loans not originatingfrom the EU fall under the exemption specified under Article 7(3) of the Disclosures Delegated Act?
###### d. Calculation and valuation of exposures
52. Should credit exposures be considered at their gross value, i.e. before adjusting for expected credits losses?
53. For investments, in addition to the assessment of taxonomy-alignment, a taxonomy ratio needs to be calculated that will be “applied” to the year-end book value of the investment (i.e. the “extent and proportion that the project funded finances a taxonomy-aligned economic activity”). The ratio is calculated based on a value that could potentially change over time (the value is not specified in the Disclosures Delegated Act, but could be the market value of the purchased asset or the turnover and CapEx that is generated within the project that is financed). Since this value may change over time, should the ratio applied to the yearend book value be updated regularly or should the initial value be used throughout the lifetime of the investment?
54. For fair value adjustments from hedge accounting, what is the proposed treatment of a fair value adjustment of a portfolio hedge on the interest rate risk? Should the fair value adjustment be on the derivatives line item in the reporting template or should the fair value adjustment affect the gross carrying amount of the hedged items (being the loans and advances)?
55. The numerator of the GAR equity instruments is described as: “the gross carrying amount of the equity instruments not held for trading weighted by the turnover and CapEx KPI related to taxonomy-aligned economic activities as disclosed by the non-financial undertaking to which the equity instruments belongs.” As the turnover and CapEx KPIs will be different numbers, and the gross carrying amount of the equity instruments will be a single number, how should this calculation be performed?
56. Should total assets in Annex VI templates equal total assets as defined in FINREP?
57. How should intra-group lending be defined for Taxonomy-alignment purposes?
58. How should the time-limits of transitional activities be considered in the Taxonomyassessment when maturities of the financing are longer than those time-limits?
59. What auditing timelines should apply to loan collateral acquired by a credit institution as a repossession?
###### e. Filling in the templates
60. How should credit institutions be defined when completing the templates included in Annex VI?
61. How should NACE codes be assigned to exposures for the purpose of template 2 of GAR disclosures included in Annex VI DDA?
62. What is the definition of supranational issuers and in which row of template 1 set out in Annex VI should exposures to supranational issuers be reported (e.g., Row 51, 52)?
63. For each of the templates included in Annex VI DDA, what is the timeline for disclosure (in particular, for template 4 GAR KPI flow, that this is not required to be disclosed until 2025, based upon 2024 vs. 2023 data)?
64. How to fill in ‘of which’ columns in the templates in Annex VI DDA?
65. Should credit institutions consider as flow the amount of new exposures based on gross carrying amount (as indicated in Annex V DDA) or the flow of loans calculated based on t versus t-1 on a net basis (as indicated in the headnote to template 4)?
66. Is the use of the term ‘specialised lending’ limited to project finance or does it include any use of proceeds?
###### B. Insurance and reinsurance undertakings
67. Regarding KPIs related to underwriting activities, for multi-risk insurance products covering also climate-related perils do insurance undertakings disclose as Taxonomy-aligned only the relevant share of the insurance premium related to climate-related perils or the full insurance premium embedded in a wider insurance product? Is it sufficient if at least one insurance policy in the line of business offers coverage of climate-related perils to infer the
Taxonomy-alignment of the entire line of business?
68. How should reinsurance undertakings apply the pro-rata approach explained in the response to question 67 to treaty business, given that a portion of the underlying products covered by a treaty may not relate to climate-related perils?
69. How should insurance and reinsurance undertakings comply with the TSC on data sharing set out in the TSC concerning substantial contribution to climate change adaptation in point (4) of Sections 10.1. and 10.2. of Annex II to the Climate Delegated Act? Does this mean that loss data is to be made available and free of charge to anybody requesting it? Where should the declaration of intention to be made?
70. How should the DNSH and minimum safeguards columns in Annex X be filled?
71. As there is no breakdown mentioned between CapEx and turnover, which value should be reported by insurance or reinsurance undertakings in lines 4 to 11 of the second template of Annex X DDA? Similarly, which value should be reported by asset managers in lines 4 to 10 of the template in Annex IV DDA?
#### Annex I – Voluntary reporting of KPIs by entities that are not financial undertakings, but which provide certain types of financial services
#### Annex II – Examples of computation of weighted average of KPIs on Taxonomy-aligned activities of groups