The European Find and Asset Management Association appreciates the opportunity to submit its views to the European Supervisory Authorities (ESAs) on the Joint Consultation Paper (CP) regarding draft regulatory technical standards (RTS) for taxonomy-related sustainability disclosures pursuant to Article 8(4), 9(6) and 11(5) of Regulation (EU) 2019/2088 (Taxonomy Regulation or TR).
EFAMA is a pan-European organisation representing the full diversity European investment management industry towards European policymakers, as well as international public bodies. At the end of Q2 2020, assets managed by European asset managers as investment funds and discretionary mandates amounted to an estimated EUR 24.9 trillion. Our members include 28 national associations, which bring their country-specific expertise and viewpoints to our committees. Our 58 corporate and 24 associate members add multinational company perspectives to our work.
Executive Summary
- Timeline-related implementation challenges
EFAMA points out that if the taxonomy-related amendments to the SFDR RTS are finalised only after the Commission endorsed the SFDR RTS submitted by the ESAs in February, the technical standards would not be endorsed as a single rulebook. On the contrary, it would result in two sets of RTS coming into force at different times, resulting in confusing interpretation by the market. If the amended RTS are adopted in Q3 2021, the timeline will not allow sufficient time to meet the new disclosure requirements ahead of 1 January 2022 and it will cause double implementation efforts. Therefore, we would urge the European Commission to allow in the first year of the Taxonomy's application (1 January to 31 December 2022) a best-effort, transitional implementation for financial undertakings' taxonomy Level 2 disclosures on the provisions in Articles 5, 6 and 8. A best-effort application of the taxonomy-related RTS amendments would also limit the number of times pre-contractual documents will need to be updated and lead to less confusion by end-investors.
- Key performance indicators
We underline that the amended RTS should seek consistency with the KPI specifications provided under the forthcoming Delegated Act under Article 8 of the Taxonomy Regulation. In principle, financial undertakings should be allowed the choice of 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, as outlined by the Technical Expert Group[1]. We recognise that the most significant advantage of the “either Turnover, or CapEx method” at product-level (option preferred by ESAs) is standardisation, comparability and clarity for end-investors. However, we also see merits in a blend of both CapEx and Turnover indicators at the product level. Such a method would be more relevant for investment strategies focusing on both highly green and transitioning companies and be more consistent with the proposed approach in the EU Ecolabel for retail financial products Technical Report 4.0[2].
- Derivatives
Given the complexity of derivative financial instruments, we believe their mandatory inclusion could raise several technical questions and lead to disproportionate reporting requirements. For the time being, derivatives should be included only on an optional discretionary basis, depending on the deemed relevance in the context of the exposure to taxonomy-compliant activities of the portfolio. For example, we would consider it reasonable to include it in the calculation of the so-called participation certificates, i.e. derivatives or structured notes that strictly track the performance of their respective underlying asset.
- 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. We recommend that the proportion of non-assessable assets be disclosed in the template as a secondary indicator in a pie chart or the accompanying narrative. At the same time, we recognise that the draft delegated Regulation under Art. 8 of the Taxonomy Regulation published on 7 May 2021 explicitly excludes any exposures to central governments and central banks from both the numerator and the denominator of taxonomy-related KPIs. We insist that the Commission should fully align the treatment of sovereign bonds for the purpose of KPI calculations under both Level 2 measures.
- Assessment of statements on compliance by external or third parties
We do not see a need for these statements to be audited by external or third parties, as the market and standards are not mature enough to include third-party assessments. Regular auditing firms have, so far, no practical experience with the application of the EU Taxonomy. Therefore, the added value of an external verification would be somewhat limited and would only produce additional costs that the end-investors would ultimately bear. Such auditing expenses could deter asset managers, particularly smaller ones, from making taxonomy investments. Financial Market Participants are already confirming whether products are aligned with the Taxonomy and are taking responsibility for these statements. Therefore, third-party opinions on alignment should be optional and the focus should be on auditing the underlying ESG company information at its source.
- Periodic disclosures
As companies begin to report their taxonomy alignment only in 2022, the periodic disclosures Level 2 requirements should enter into application in 2023 (for reference periods starting on or after 1 January 2022), given that investors will not have the data available for periodic disclosures yet in 2022. In a joint supervisory statement published in February 2021, the ESAs recommended that the Commission specifies that the RTS applies to periodic reports with reference periods starting from 1 January 2022 in case the RTS are not adopted early enough to allow at least six months to enable financial market participants to gather the necessary information. As the amendments proposed in this consultation will be adopted only in Q3 2021, thereby not providing at least six months for information gathering, we urge the ESA's to reiterate this recommendation.
- Templates for products with social objectives
While waiting for a complete taxonomy, a product should be able to positively claim a social objective, and not only in opposition to the climate taxonomy. Otherwise, products with a social objective would be required to mark the box "not aligned with the EU Taxonomy", which could negatively affect the products' distribution. Therefore, we suggest offering product developers the opportunity to indicate whether products pursue social or environmental objectives. The taxonomy alignment boxes should only be ticked for funds with environmental objectives/ characteristics.
- Data costs
A high burden 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. One should be careful not to create a kind of indirect tax or license to operate, whereby investors would be obliged to buy data from external providers. Due to the market concentration amongst ESG data, research and rating providers, there is a risk for exorbitant fees being charged by taxonomy data providers, leading to increased costs for end-investors. Higher costs would be detrimental for smaller asset managers and create barriers to entry for new players. As it is crucial to preserve the competitiveness of the European players, a balance must be found between transparency and the reporting burden.
[1] TEG Final Technical Report on the Taxonomy (p.30, 2020).
[2] EU Ecolabel for retail financial products Technical Report 4.0 (p.25, 2021)
