What’s been published?
On 7 May 2021, new disclosure rules for reporting the environmental performance of activities and investments were published for consultation by the EU Commission. The proposed new rules require in-scope companies (financial and non-financial) to disclose against the newly published EU standards for environmentally sustainable activities (see here for our previous article on these standards).
Who is impacted by the new disclosure rules?
Initially, compliance with the rules will be mandatory for large1 banks, insurers and listed EU companies with >500 employees. From January 2023, the 500-employee threshold will, under current proposals, fall-away and the scope of mandatory compliance will be extended to include all large EU companies (listed and non-listed), all EU banks and insurers (regardless of legal structure) and non-EU companies (except micro-companies) listed on an EU market. From January 2026, it is proposed that EU listed SMEs be subject to the new disclosure rules on a proportionate basis. Voluntary compliance is a matter for individual companies.
From when do the new disclosure rules apply?
1 January 2022.
Is this a fixed application date?
Yes, it was fixed under Level 1 (primary EU) legislation published in June 2020. However, the disclosure rules, set down in proposed Level 2 (secondary EU) legislation, are subject to change ahead of the 1 January 2022 application date, as they are under EU consultation until 2 June 2021. Final EU disclosure rules are expected by end June 2021. Given the limited consultation period (just shy of 4 weeks) and the fixed application date, the final rules published at the end of June are not expected to materially differ from the consultation version. The consultation response form is available here.
What information is required to be disclosed?
Non-financial companies in scope (see above second Q&A on scope) must disclose, in quantitative and qualitative terms, whether and to what extent their activities meet EU sustainability standards set down in the EU Taxonomy (see here for our latest article on the Taxonomy). Environmental performance must be assessed on a per-activity basis using KPIs related to turnover (proportion of net turnover in Taxonomy-compliant activities), CapEx (proportion of Taxonomy-compliant capital expenditure) and OpEx (proportion of non-capitalised costs in Taxonomy-compliant activities) .
Financial companies (fund managers, banks, investment firms and (re)insurers) in scope, must disclose the proportion of their overall investments in activities which meet EU sustainability standards, using a single ratio per company based on one of the above three KPIs. A three-year phase-in will apply to SME and non-EU investments. Investments in sovereign debt are wholly excluded from the disclosure rules and derivative investments are deemed non-compliant (for the purposes of these disclosure rules) with EU sustainability standards.
Banks must disclose on both lending activities and trading portfolios using, in the main, the ‘green asset ratio’ (investment in Taxonomy-compliant activities/ total covered assets). There are also KPIs for financial guarantees (FinGuar KPI), assets under management (AuM KPI) and fees and commissions (F&C KPI). Insurers must disclose KPIs related to both investment (green investment ratio) and underwriting activities (Taxonomy-compliant non-life gross premiums written/total non-life gross premiums written). Asset managers must disclose, based on underlying investee companies’ KPI disclosures, the proportion of AuM (from both collective and individual portfolio management activities) invested in Taxonomy-compliant activities.
Where should disclosures be included?
In the company’s non-financial statement or if non-financial information is reported separately, in that separate report.
Will all of the new rules apply on 1 January 2022?
No. It is proposed that (i) from 1 January 2022 (reporting period 2021) the disclosures required are limited to the level of activities/investment in activities which comply with EU sustainability standards along with qualitative disclosures; (ii) from 1 January 2023, all qualitative and quantitative (ex non-EU) disclosures are mandatory; and (iii) from 1 January 2025, all rules are fully effective and in force.
1 Large companies are those which exceed at least two of three criteria of (i) balance sheet total of €20m; (ii) net turnover of €40m; (iii) average number of employees during the financial year of 250.
Contributed by Nessa Joyce