ESG: European Regulators Publish Revised Secondary Rules and Templates for Environmental-Related Sustainability Disclosures

1. Overview

The European Supervisory Authorities (ESAs) have published the draft Regulatory Technical Standards¹ (“Taxonomy RTS”) on product-level disclosures that apply to funds or portfolios that promote or make environmentally sustainable investments in accordance with the criteria of the EU Taxonomy Regulation.

The draft Taxonomy RTS amend the final draft RTS published by the ESAs under the Sustainable Finance Disclosure Regulation (SFDR) on 2 February 2021² with the aim of creating a “single rulebook” for sustainability disclosures that consolidates the secondary rules for the SFDR and the Taxonomy-related disclosures.

This client alert outlines the key requirements of the Taxonomy RTS as relevant to alternative investment managers and their funds or portfolios (“financial products”).

2. Taxonomy-Related Product-Level Disclosures

The Taxonomy Regulation establishes an EU-wide classification system intended to provide issuers, financial institutions and investors with a common language to identify the extent to which economic activities are “environmentally sustainable”. To be environmentally sustainable, an economic activity must:

1. Contribute substantially to at least one of the environmental objectives.
2. “Do no significant harm” to any of the other environmental objectives.
3. Comply with certain minimum social and governance safeguards.
4. Comply with certain technical screening criteria.

The environmental objectives are:

1. Climate change mitigation.
2. Climate change adaptation.
3. The sustainable use and protection of water and marine resources water.
4. The transition to a circular economy.
5. Pollution prevention and control.
6. The protection and restoration of biodiversity and ecosystems.

The Taxonomy product-level disclosures supplement the SFDR product-level pre-contractual and periodic disclosures with specific disclosures for funds or portfolios that promote “environmental characteristics” (Light Green) or that make “environmentally sustainable investments” (Dark Green).

Pre-Contractual Disclosures

The RTS include the more detailed requirements about the additional information that must be disclosed in the pre-contractual disclosures by Light Green and Dark Green financial products, examples of which include:

1. The identification of the environmental objectives to which the sustainable investment underlying the financial product contributes.³
   
   
2. A new section dedicated to Light Green and Dark Green products, that must include⁴:
   
   
   1. A graphical representation in the form of a pie chart of the minimum taxonomy alignment of investments, calculated in accordance with the methodology set out by the RTS.
      
      
   2. Where the financial product invests in economic activities that are not environmentally sustainable economic activities, a clear explanation of the reasons for doing so.
      
      
   3. A description of the investments underlying the financial product that are in environmentally sustainable economic activities. The description must include:
      
      
      • For investee companies that are nonfinancial undertakings, whether the taxonomy alignment of investments is measured by turnover, capital expenditure or operational expenditure and the reason for that choice, including how that choice is appropriate for investors in the financial product.
        
        
      • Where information relating to the taxonomy alignment of investments is not readily available from public disclosures by investee companies, details of how equivalent information was obtained directly from investee companies or from third-party providers.
        
        
      • A breakdown of the minimum proportions of investments in “enabling activities”⁵ and “transitional activities”⁶, in each case expressed as a percentage of all investments of the financial product.
        
        
3. Where a financial product commits to making one or more sustainable investments in environmentally sustainable economic activities:

1. 1. A statement that the economic activities invested in by those sustainable investments are environmentally sustainable economic activities.
      
      
   2. Whether the statement has been subject to an assurance provided by an auditor or a review by a third party and, if so, the name of that auditor or third party.

Periodic Disclosures

The RTS include the more detailed requirements about the additional information that must be disclosed in the periodic disclosures by Light Green and Dark Green financial products, examples of which include:

1. The identification of the environmental objectives to which the sustainable investment underlying the financial product contributed.
   
   
2. A new section dedicated to Light Green or Dark Green products, that must include:
   
   
   1. A breakdown of the proportion of each of the environmental objectives to which the sustainable investments contributed.
      
      
   2. A description of the sustainable investments in environmentally sustainable economic activities during the reference period, including further prescriptive requirements in the RTS setting out the details.
      
      
3. If the financial product invested in economic activities that are not environmentally sustainable economic activities during the reference period, a clear explanation of the reasons for doing so.
   
   
4. Where a financial product commits to making one or more sustainable investments in environmentally sustainable economic activities during the reference period:

1. 1. A statement that the economic activities invested in by those sustainable investments are environmentally sustainable economic activities.
      
      
   2. Whether the statement has been subject to an assurance provided by an auditor or a review by a third party and, if so, the name of that auditor or third party.

Accordingly, the ESAs have revised the mandatory pre-contractual and periodic disclosure templates published in February 2021 to add the Taxonomy-related disclosure requirements.

See Annexes I to IV of this client alert for the revised disclosure templates.

3. Timelines

The ESAs estimate finalising the RTS by late June or early July 2021 with the final RTS applying from 1 January 2022. The Taxonomy-related disclosure obligations will apply in the EEA in phases from 1 January 2022 for the first two environmental objectives⁷, and from 1 January 2023 for the remaining four environmental objectives⁸.

Annexes to this alert:

Annex I: Revised Pre-Contractual Disclosure Template for Article 8 Financial Products (See here).

Annex II: Revised Pre-Contractual Disclosure Template for Article 9 Financial Products (See here).

Annex III: Revised Periodic Disclosure Template for Article 8 Financial Products (See here).

Annex IV: Revised Periodic Reporting Template for Article 9 Financial Products (See here).

Contact Information

For further information or advice, please contact one of the partners named below or your usual contact at Akin Gump.

The contribution of Andrea Gonzaga is gratefully acknowledged.

¹ Joint Consultation Paper, Taxonomy-related sustainability disclosures, published 17 March 2021 (See here).

² Final Report on draft Regulatory Technical Standards: with regard to the content, methodologies and presentation of disclosures pursuant to Article 2a(3), Article 4(6) and (7), Article 8(3), Article 9(5), Article 10(2) and Article 11(4) of Regulation (EU) 2019/2088, 2 February 2021 (See here).

³ Article 14(2) and Article 21(2) of the revised RTS.

⁴ Article 16a(1)(a) and Article 23a(1)(a) of the revised RTS.

⁵ “Enabling activities” are defined by Article 16 of the Taxonomy Regulation as an economic activity that contributes substantially to one or more of the environmental objectives set out in Article 9 of the Taxonomy Regulation by directly enabling other activities to make a substantial contribution to one or more of those objectives, provided that such economic activity:

1. does not lead to a lock-in of assets that undermine long-term environmental goals, considering the economic lifetime of those assets; and
2. has a substantial positive environmental impact, on the basis of life-cycle considerations.

⁶ “Transitional activities” are defined by Article 10(2) of the Taxonomy Regulation as an economic activity for which there is no technologically and economically feasible low-carbon alternative but qualifies as contributing substantially to climate change mitigation where it supports the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1.5 degrees Celsius above preindustrial levels, including by phasing out greenhouse gas emissions, in particular emissions from solid fossil fuels, and where that activity:

1. has greenhouse gas emission levels that correspond to the best performance in the sector or industry;
2. does not hamper the development and deployment of low-carbon alternatives; and
3. does not lead to a lock-in of carbon-intensive assets, considering the economic lifetime of those assets.

⁷ Climate change mitigation and climate change adaptation.

⁸ The sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems.