Shearman & Sterling LLP | FinReg | European Banking Authority Publishes Opinion on Disclosure Indicators and Methodology Under Taxonomy Regulation
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  • European Banking Authority Publishes Opinion on Disclosure Indicators and Methodology Under Taxonomy Regulation

    The European Banking Authority has published an opinion and a report on the key performance indicators and methodology that firms subject to the EU Taxonomy Regulation should adopt when disclosing information on the extent of their environmentally sustainable activities. The EU Taxonomy Regulation was published in June 2020 and establishes a classification system for sustainable activities to provide a consistent, EU-wide understanding of the environmental sustainability of activities and investments. The Regulation imposes an obligation upon EU firms that report under the Non-Financial Reporting Directive to disclose information on how, and the extent to which, their activities constitute economic activities that are "environmentally sustainable" for the purposes of the Taxonomy Regulation. Corporates will have to begin disclosing information on certain environmental objectives from January 2022, with disclosures on other objectives disclosed from January 2023. Most provisions of the Taxonomy Regulation have applied directly across the EU since July 12, 2020.
    In September 2020, the Commission sought the views of the three European Supervisory Authorities on the KPIs and methodology that firms subject to the Taxonomy Regulation should adopt to comply with their disclosure obligations. The ESAs have provided individual responses related to the specific firms within their remit.
    The EBA's opinion provides recommendations for banks and investment firms.
    Activities that should form the subject of disclosure

    The EBA recommends that firms should make disclosures in relation to activities where: (i) the bank or investment firm can reasonably assess the alignment of their portfolio with the taxonomy; or (ii) the activities are connected with counterparties or clients who are required to disclose information under the Taxonomy Regulation.

    The KPIs that will form the basis of disclosures

    For banks, the EBA does not believe the existing KPIs in the Taxonomy Regulation (based on turnover, capital expenditure and operational expenses) are appropriate and recommends alternative KPIs, including a "green asset ratio" which sets out the ratio of taxonomy-aligned exposures (i.e. "green assets") compared to total exposures of the institution. For investment firms, the EBA recommends that KPIs should vary depending on the activity being conducted by the investment firm, meaning "dealing on own account" activities should form the subject of a green asset ratio disclosure, whereas other activities should form the subject of a KPI based on fees, commissions and other monetary benefits.

    The EBA's recommendations also cover: (i) the methodology to be adopted in calculating the KPIs; (ii) the need for qualitative exposures to accompany the quantitative KPIs, providing explanations to aid the market's understanding of the KPIs; and (iii) a series of policy options that the Commission may undertake to enhance the quality of firms' disclosures.
    The opinion is accompanied by detailed advice set out in a separate report. The Commission intends to use the EBA's advice as the basis for an impact assessment on a delegated act to be adopted by June 2021. The EBA has also noted that its advice is consistent with the separate advice it is publishing on draft Implementing Technical Standards for Pillar 3 disclosures on environmental, social and governance risks.
    View the EBA's Opinion.
    View the EBA's Report.  
    View details of ESMA's report.
    View details of the EU Taxonomy Regulation.
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