06 January 2021

SMSG Response to ESMA’s Consultation on the Draft Advice to the European Com-mission under Article 8 of the Taxonomy Regulation

The SMSG largely supports ESMA’s draft advice to the European Commission. Nevertheless, the SMSG makes a number of general comments and advises ESMA to change or refine its approach in respect of specific aspects of the draft.

I. Background

1. On 15 September 2020, ESMA received a call for advice from the Commission, requesting input on how the three KPIs to be disclosed by non-financial undertakings should be further specified and what infor-mation asset managers subject to the Non-Financial Reporting Directive should disclose on how their activities are directed at funding environmentally sustainable economic activities.
2. On 5 November 2020, ESMA launched a consultation on its draft advice to the European Commission under article 8 of the Taxonomy Regulation. This report presents the SMSG‘s advice to ESMA in view of this consultation.
3. The SMSG largely supports ESMA’s draft advice to the European Commission. Nevertheless, the SMSG makes a number of general comments and advises ESMA to change or refine its approach in respect of specific aspects of the draft.

II. General comments

4. The SMSG is aware that neither the decision on timing, nor on the scope, nor on the size of non-financial undertakings falling under the scope of the NFRD fall within ESMAs remit. Some members, however, deemed it important to point to certain observations in that regard.
The timing of alignment of the different pieces of legislation and phasing of disclosure obligations
5. The SMSG would like to begin with reiterating its previous advice (see SMSG advice on ESG disclosure1) to consider carefully the timing issue and phasing of disclosure obligations and the relation between the timings of various consultations.
6. The timeline for the application of the new reporting requirements is very challenging for companies, in particular in the aftermath of the COVID pandemic. EU corporates are in need of their Working Capital and liquidity to support their operations in the face of a dual supply and demand shock that has produced a very deep recession in the EU and globally. Moreover, the required adjustments necessitate a reor-ganisation of corporations’ business models and strategies as well as the adaptation of their resources and education of their teams. In a nutshell, compliance with the new reporting requirements will take time and will also generate considerable additional costs. In addition, asset managers will need to report in percentages the “green” proportion of their investment portfolios and these will depend on the time non-financial undertakings will disclose and make available information from the KPIs.
7. As non-financial undertakings are in need of flexibility to adapt and asset managers rely on the disclosure provided by non-financial undertakings, the SMSG recommends a phasing in of the new disclosure re-quirements or an extension of the deadline for implementation and/or a pilot phase. The SMSG under-stands that the new disclosure requirements will apply in 2022 regarding FY 2021 (e.g. publication in 2022 of revenue, CapEx and if relevant OpEx related to financial year 2021). Since the delegated act (DA) is to be adopted by 1 June 2021, at the latest, and the Parliament and Council benefit from a three-month objection period, the DA is unlikely to be published in the Official Journal before Q4 2021. As already explained, companies will not have sufficient time to prepare their accounting and reporting to comply with the new requirements.
8. The SMSG is mindful of the continuous work of the Platform on Sustainable Finance, as well as contin-uous legislative efforts in areas closely related to the subject of this Consultation, such as the pending review of the Non-Financial Reporting Directive. This Advice is not meant to interfere with these pro-cesses or pre-empt in any way their findings.
Geographical Scope
9. The SMSG recommends further clarification regarding how the proportion of revenue, Capex and if rel-evant OpEx realised outside the EU – in third countries – should be assessed and accounted for against the Taxonomy Regulation criteria. This proportion can be significant for non-financial undertakings oper-ating worldwide. The SMSG advises ESMA to provide guidance regarding how to account for activities carried out in third countries, e.g. by providing a standardised table.
10. Asset managers invest in assets of issuers outside the EU, which do not provide Taxonomy-related disclosures. The SMSG advises ESMA to provide guidance to asset managers how to deal with such situations, e.g. (i) by providing that asset managers should engage with such companies to encourage them to produce Taxonomy-related disclosures on a voluntary basis; and (ii) by providing examples of disclosures of the proportion of assets on which asset managers could not obtain the necessary data.
Consistency of approach between supervisory bodies
11. EBA and EIOPA are also invited to provide similar advice on the delegated act, to be adopted within their respective remits. The SMSG advises that ESMA, EBA and EIOPA take a consistent approach when coordinating the three pieces of advice which will be delivered to the Commission.....

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