How should firms compute KPIs to determine taxonomy alignment?

ESMA’s draft advice to the European Commission on the disclosure of key performance indicators in relation to Taxonomy-aligned activities

Objective

The Regulation (EU) of 18 June 2020 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 (“Taxonomy regulation”) requires companies and asset managers that fall in scope of the Non-Financial Reporting Directive (“NFRD”) to disclose key performance indicators (“KPIs”) in relation to the portion of their activities which are Taxonomy-aligned.

Very few asset managers report under the NFRD at the moment due to current thresholds¹. However, the on-going NFRD review could bring more asset managers in scope. The draft advice also gives a flavor of the principles investee companies will have to follow in reporting these KPIs. The data reported will be pivotal, notably for Luxembourg funds promoting environmental characteristics² and for those with an objective of sustainable investment³ who will be required to report the portion of their Taxonomy-aligned assets and may be eligible to a reduced subscription tax rate pursuant to the budget law 2021.

Primary Change

The draft advice clarifies the definitions and the criteria non-financial undertakings should use for the calculation of the portion of turnover, capital expenditures (“CapEx”) and operational expenditures (“OpEx”) associated with economic activities that qualify as environmentally sustainable. For both CapEx and OpEx, the cost incurred should be part of a plan which must meet certain conditions.

The draft advice also specifies the elements of accompanying disclosures in respect of the methodology used to calculate the KPIs and their presentation in a standardized table format.

The draft advice also clarifies how asset managers are expected to calculate the portion of their Taxonomy-aligned asset on the basis of turnover. It also suggests to develop a methodology to allow a calculation covering investments in companies which are not in scope of NFRD reporting requirements.

KPIs for asset managers

Definition

The KPI should be a ratio of eligible investments that are taxonomy-aligned.

The numerator should sum the value of green bonds complying with the EU Green Bond Standard and the weighted average of the value of the investments invested in taxonomy-aligned activities of investee companies measured by turnover. Additional calculations for CapEx and OpEx may also be provided.

The denominator should consist of the value of the total eligible investments (equity and fixed income assets) in investee companiesheld by the asset manager’s funds.

Methodology

ESMA considers a specific methodology should be developed to address data gaps arising from investments in companies not reporting under NFRD. A coefficient derived on a sector basis under a common methodology would be used to quantify the extent of the taxonomy-aligned activities for such companies and enable asset managers to calculate a KPI covering the whole universe of their eligible investments.

The KPI calculation should not cover derivatives but allow the netting methodology used to calculate net short positions set out in the Short-Selling Regulation.

Presentation

The environmental objective the investments contribute to should be identified. Where possible, the activities invested in should be identified for each investment objective. 

Appropriate side information should be presented in the vicinity of the standard table, including a link, if relevant, to the disclosure on the principal adverse impacts of investment decisions on sustainability factors⁴.