The rules on the choice of key performance indicators (KPIs) for reporting a financial product’s alignment with the EU’s sustainability taxonomy should take into account the type of the disclosure being made to investors, according to Eurosif.

The association was responding to a consultation by the European Supervisory Authorities (ESAs) on draft rules for taxonomy-related sustainability disclosures, which connect the EU sustainable finance disclosure regulation (SFDR) with the EU taxonomy.

One of the main points Eurosif highlighted was with regard to the KPI for the disclosure of the extent to which investments are aligned with the taxonomy, which is based on the share of the taxonomy-aligned turnover, capital expenditure or operational expenditure of all underlying non-financial investee companies.

Eurosif indicated it agreed that financial market participants should not be able to use a mix of KPIs across portfolios, as this would make it more challenging to understand the level of alignment.

However, it said it wanted to draw the ESAs’ attention to the importance of distinguishing between pre-contractual disclosure and periodic reporting when it came to financial market participants’ KPI choice.

It suggested such an approach was merited because the two disclosure types had a different purpose.

“The former would contain an ex-ante target or commitment of financial market participants to align with the taxonomy while the latter would provide an ex-post report of how the investment portfolio over a certain period of time has aligned with the taxonomy,” said Eurosif.

It said it would understand having one KPI chosen by the financial market participant in pre-contractual disclosure, but recommended that for periodic reports financial market participants should report on all three KPIs.

It said this would allow for the best comparison between products and deliver additional useful information for the end-investor.

“Turnover will for example be very important for investors seeking to align their capital with companies that are as much as possible already taxonomy aligned by investing in financial products focusing on this,” said Eurosif.

“The capex indicator may however be more interesting for investors focusing on transition finance and seeking to select financial products focused on this theme.

“And both together will provide a complete picture of transition challenges for particular industries.”

Overall, Eurosif said it was broadly supportive of the ESAs’ draft regulatory technical standards.

It backed their proposal to create a single rulebook for sustainability-related disclosures and said it was “very supportive” of the proposal to include all of a financial product’s investments, including in assets such as sovereign bonds where taxonomy alignment is challenging to assess, in the denominator for the KPI.

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