The European Fund and Asset Management Association (EFAMA) has urged the European Commission to provide for a transitional period in the first year of the taxonomy's application to some key financial undertakings, in its response to the joint European Supervisory Authorities (ESAs) consultation on taxonomy-related sustainability disclosures in the Sustainable Finance Disclosure Regulation (SFDR).

EFAMA said there was a need for full consistency between taxonomy alignment metrics used by financial undertakings for taxonomy-related disclosures in SFDR, the Article 8 Taxonomy Delegated Act and the portfolio greenness formula in the EU Ecolabel for retail financial products.

Dominik Hatiar, regulatory policy advisor at EFAMA, said: "If the amended RTS are adopted in Q3 2021, the timeline will not allow sufficient time to meet the new disclosure requirements ahead of the 1 January 2022 application date.
"We urge the European Commission to provide for a transitional period in the first year of the taxonomy's application to financial undertakings´ Level 2 disclosures, specifically Articles 5, 6 and 8 of the taxonomy.

A transitional application of the new taxonomy-related RTS amendments currently consulted on would also limit the number of times pre-contractual documents will need to be updated and lead to more clarity for the end-investors".

EFAMA highlighted six key issues that the ESAs ought to address:

Timeline-related implementation challenges - If the taxonomy-related amendments to the SFDR RTS are finalised only after the Commission endorsed the initial SFDR RTS submitted by the ESAs in February, the technical standards would not be endorsed as a single rulebook. On the contrary, it could result in two sets of RTS coming into force at different times, thereby confusing the market.

Key performance indicators (KPI) - The amended RTS should seek consistency with the KPI specifications provided under the forthcoming Delegated Act under Article 8 of the Taxonomy Regulation. EFAMA does not have a clear preference between the ESA´s preferred approach of choosing either Turnover or CapEx at the product level on the one hand, and the blended KPI of both indicators, consistent with the methodology used in the EU Ecolabel for retail financial products, on the other hand.

While the ESA´s approach has clear advantages in terms of comparability and clarity for end-investors, a blended KPI would provide a more accurate figure of taxonomy alignment for funds investing in both green and transitioning companies.

In principle, EFAMA believes financial undertakings should be allowed to choose either indicator (Turnover or CapEx), depending on which indicator is more relevant to a particular sector or company. This flexibility is essential for CapEx-based sectors, such as real estate, and for the objective of climate adaptation since turnover cannot be recognised for adapted activities.

Assets not covered by the Taxonomy - The Commissions' approach to non-assessable assets, such as sovereign bonds, cash or commodities needs to find a balance between the principles of comparability, conciseness, and relevance. While a mandatory inclusion of all assets might boost comparability, it will also significantly dilute the taxonomy alignment ratio and unduly penalise funds with high exposure to assets that have no chance of becoming taxonomy aligned. EFAMA therefore recommends that the proportion of non-assessable assets be disclosed as a secondary indicator.

Periodic disclosures - As companies begin to report their taxonomy alignment only in 2022, the periodic disclosures Level 2 requirements should only enter into application in 2023 given that investors will not have the data available for periodic disclosures until 2022.

Templates for products with social objectives - As the Taxonomy is not yet complete, products should be able to claim a positive social objective, and not only be assessed against the climate taxonomy. Otherwise, current products with a social objective would be required to mark the box ‘not aligned with the EU Taxonomy', negatively affecting the products' distribution. We suggest offering an option where product teams can indicate whether products pursue social or environmental objectives.

Data costs - A high burden is placed on the Financial Market Participants to comply with the SFDR and taxonomy disclosures requirements when accurate, consistent, and comparable data on taxonomy alignment is not available. Due to the market concentration amongst ESG data, research and rating providers, there is a risk for high fees being charged by taxonomy data providers, leading to increased costs for end-investors and creating barriers to entry for new players and sustainable investors.

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