The European Commission has been advised to amend the European Union Taxonomy to introduce materiality thresholds, allow estimates and promote investments into SMEs.
A report published today by the Platform on Sustainable Finance (PSF) outlines more than 100 pages of recommended revisions to the disclosure requirements associated with the regulation.
Among the proposals are a call to allow entities to use estimated data and proxies for the first time under the mandatory reporting rules.
Currently, companies and financial institutions are prohibited from using estimates to fill in gaps in their taxonomy disclosures.
Today’s report said that the ban should be lifted, and minimum standards should be developed to avoid the misuse or cherry-picking of estimated data. It also puts forward a simplified approach to the Taxonomy’s ‘Do No Significant Harm’ (DNSH) criteria, which are widely seen by companies and investors as too strict.
The DNSH screens should temporarily be used on a comply-or-explain basis for revenues, the report said, although they should remain mandatory for capital expenditure, which is generally forward-looking and therefore easier to comply with.
The Platform also called on the Commission to introduce “a streamlined and voluntary approach for banks and investors’ exposures to unlisted SMEs” and a consistent approach to deal with derivatives across the Taxonomy, the Sustainability Finance Disclosures Regulation and the EU’s other sustainability-related rules.
Materiality thresholds should be introduced into the Taxonomy Regulation, so that entities do not have to report on every single economic activity they undertake, even if it’s a negligible part of their business.
“That would please a lot of people, because it would focus the disclosures on the key areas and ease the reporting on coincidental eligibility, so to speak,” explained Nicolas Redon, a senior green finance analyst at French consultancy Novethic.
“But, as the Platform points out, this adjustment should come with safeguards to prevent selective or subjective assessments.”
The report suggested significant changes to the way that Green Asset Ratios (GAR) are calculated for banks, partly to ensure they are not penalised inappropriately by their shareholders when compared with their peers.
Last year, IPE reported that the German government’s sustainable finance advisory body was calling for an overhaul of the Taxonomy’s GAR rules.
The group said the top-line numbers generated by the calculation “receive a great deal of public attention” and influence the opinion of investors and the public, but are often not representative of lenders’ climate credentials – especially for banks with significant exposure to SMEs and non-EU companies.
Redon said the recommendations were “fairly well thought through”.
“A lot of what’s suggested makes sense,” he told IPE.
The Platform claims that, if the Commission makes all the proposed changes, it will achieve its target of reducing the reporting requirements under the Taxonomy by 25%.
Currently, the Commission plans to add the Taxonomy Regulation to an ‘omnibus package’ later this month, which will see it renegotiated to achieve the target.
Today’s report echoes a statement issued by more than 150 investors on Tuesday, which argued that the streamlining of Europe’s sustainability rules should take place via the technical criteria, not by renegotiating the underlying laws.
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