European Commission Significantly Cuts Back Taxonomy Reporting – A Look at the July 4 Delegated Regulation

While we in the US were celebrating Independence Day, large companies – including many US-based multinationals – were given their own reason to celebrate. On July 4, the European Commission adopted a Delegated Regulation scaling back EU Taxonomy reporting. The Delegated Regulation is discussed in this post. 

The adoption of the Delegated Regulation was expected. A draft regulation was published in February as part of the Commission’s first Omnibus package. Publication of that draft was followed by a public consultation. See here for Ropes & Gray’s post discussing the proposal and consultation. 

The key simplification measures of the Delegated Regulation covered in the Commission’s press release and the accompanying FAQs are discussed below. Given the complexity and technical nature of Taxonomy reporting, this post does not go through all the ins-and-outs of the Delegated Regulation and its impacts on reporting. 

Materiality thresholds 

Non-financial and financial companies will be exempt from assessing Taxonomy eligibility and alignment for economic activities that are not financially material for their business. As further discussed below, as a general rule, lack of materiality will be assumed if the cumulative value of non-material activities is below 10% of a KPI’s denominator. 

Non-financial companies

For non-financial companies, activities are considered non-material if they account for less than 10% of total turnover, capital expenditures (CapEx) or operational expenditures (OpEx). According to the Commission’s FAQs, the materiality assessment should be made for each key performance indicator independently. For example, an activity could be non-material for the turnover KPI but generate material CapEx, such as if the company plans to expand or improve its operations in the future. In this case, the company may elect not to assess its existing economic activity that generates non-material turnover (for purposes of reporting on its turnover KPI) but to include the activity in its assessment of CapEx for purposes of reporting on the CapEx KPI.

As noted in the FAQs, non-financial undertakings will have to separately report in the Taxonomy reporting templates the proportion of turnover, CapEx or OpEx that was not assessed because it was considered to be non-material.

Non-financial companies also will be exempt from assessing Taxonomy alignment for their entire OpEx when it is considered non-material for their business model. The FAQs indicate that this might for example be the case for certain service activities. In this case, the company can choose to not report its OpEx KPIs. Instead, it only will need to indicate the total amount of OpEx and explain why OpEx is not material for its business model. The Commission indicated it made this change due to the lesser informational value and decision-usefulness of information relating to the Taxonomy alignment of OpEx.

Financial companies

Financial companies subject to sustainability reporting will be exempt from assessing Taxonomy eligibility and alignment of up to 10% of their financial assets, in particular loans and investments financing specific economic activities, i.e., where the use of proceeds is known (note that the Delegated Regulation is a bit more technical). These non-material assets must be reported separately as non-material exposures in the reporting templates. If the use of proceeds of the borrower or investee is not known (e.g., general purpose loans or investments in equity), financial undertakings will instead rely directly on the Taxonomy KPIs reported by the entities they lend to or invest in, including information concerning non-material activities these entities report.

As discussed in the FAQs, credit institutions that are subject to KPIs relating to the Green Asset Ratio on stock and flow, financial guarantees, assets under management and fees and commissions have the option to not report these KPIs for financial activities and assets that are not material for their business. If the financial activities and assets captured by the KPI generate less than 10% of the credit institution's net turnover, the credit institution may elect not to report the KPI. Using the example noted in the FAQs, a credit institution may elect not to report the Green Asset Ratio for its trading portfolio if the trading activities captured by this KPI generate less than 10% of its total net turnover.

As also noted in the FAQs, the templates for financial companies provide transparency on the proportion of exposures in the denominators of the KPIs that are not assessed for Taxonomy eligibility and alignment. This may comprise three exposure categories:

• Exposures that financial companies consider non-material and therefore did not assess for Taxonomy eligibility and alignment;
• Exposures that finance activities of counterparties considered to be non-material by the counterparties and which are therefore not assessed by them (e.g., the part of a general purpose loan that corresponds to the share of non-material activities of the counterparty); and
• Exposures that finance financial companies that are using the temporary opt-out provision (discussed later in this post) and not claiming they finance or invest in economic activities associated with environmentally sustainable economic activities under the Taxonomy Regulation (e.g., a loan or investment in the equity of a financial undertaking that does not report detailed Taxonomy information and KPIs).

KPI reporting by financial companies

KPI simplification 

KPIs for financial companies have been simplified, as further discussed in this post. 

In addition, the FAQs note that the Delegated Regulation excludes from the scope of KPI reporting of financial undertakings specific categories of assets, in particular derivatives, cash and cash equivalents, on-demand interbank loans and other categories of assets, such as goodwill and commodities.

The Delegated Regulation also excludes from the scope of KPI reporting exposures to undertakings that are not subject to mandatory sustainability reporting (including Taxonomy reporting) and whose parent entity is not subject to mandatory sustainability reporting. However, financial undertakings may include in their KPIs exposures to companies that are not subject to mandatory sustainability reporting if the company voluntarily reports the Taxonomy KPIs or the exposures finance specific activities and assets for which Taxonomy-related data could be readily available, such as real estate or electric vehicles.

Exposures to special purpose vehicles that finance undertakings subject to mandatory sustainability reporting, or their assets, should be included in the denominators of financial undertakings' KPIs. This applies to both a parent company subject to mandatory sustainability reporting and its subsidiary group companies.

Optional two-year non-reporting period

Financial companies will have the option to not report detailed Taxonomy KPIs for two years, until December 31, 2027. The European Commission has announced it will undertake a more comprehensive review of Taxonomy criteria and disclosures. This accommodation is intended to provide a break for financial companies until the revised Taxonomy criteria and rules are in place.

However, to take advantage of this accommodation, financial companies may not claim, through any communication or representation to external stakeholders and the public at large, that their activities are associated with environmentally sustainable activities under the Taxonomy Regulation. Financial companies also must publish a statement in their management report indicating that they do not claim that their activities are associated with environmentally sustainable activities under the Taxonomy Regulation.

In addition, the FAQs note that, pending a more comprehensive review of the Taxonomy criteria and disclosure rules, the application of the Trading Book KPI (capturing the trading activities of credit institutions) and the Fees and Commissions KPI (capturing certain investment services or advice) are postponed by two more years until January 1, 2028.

Reporting templates and data points

The Taxonomy reporting templates have been streamlined. According to the Commission, the number of reported data points has been cut by 64% for non-financial companies and 89% for financial companies. The main changes to the reporting templates highlighted in the FAQs are discussed below.

Non-material activities and assets

The templates have been adjusted to provide transparency on the proportion in the denominator of KPIs of activities or exposures that are not assessed for Taxonomy eligibility and alignment. For non-financial companies, one data point per KPI has been added for activities considered to be non-material. The templates for financial undertakings provide transparency on the non-assessed proportion of exposures in the denominator of the KPIs.

In addition, both financial and non-financial companies that choose not to assess Taxonomy eligibility and alignment of non-material activities or assets will have to report which sector those activities or assets belong to and explain why they are considered non-material for their business. Reporting undertakings may use NACE codes for disclosing relevant economic sectors. NACE codes are the EU’s statistical classification of economic activities.

Adjusted scope of financial KPIs

The templates for financial undertakings have been adjusted to reflect that, in addition to exposures to undertakings not subject to mandatory reporting under the Corporate Sustainability Reporting Directive, exposures to derivatives, cash and cash equivalents, goodwill or commodities have been excluded from the denominator of the KPIs of financial undertakings. In addition, the templates were adjusted to reflect the possibility of including non-CSRD undertakings in the KPIs on a voluntary basis.

Fossil gas and nuclear

Separate templates on the performance of and exposures to fossil gas and nuclear activities have been deleted. This will result in a reduction of reported data points from 166 to 4 per KPI. Non-financial undertakings will report on these activities (if material) only in the “per activity” template in the same manner as for any other material activities. Financial undertakings will report on these activities, if material, in an aggregated form in their standard template.

Do no significant harm criteria 

The criteria for “do no significant harm” (DNSH) to pollution prevention and control related to the use and presence of chemicals has been simplified.

The changes include clarifying the application of exemptions relating to the uses of certain hazardous substances in electrical and electronic equipment and the use of authorized substances that deplete the ozone layer. The Commission also removed the existing requirement that reporting undertakings assess the use and presence of substances that have been self-classified according to the EU’s Classification, Labelling and Packaging (CLP) Regulation. 

As earlier noted, the Commission is launching a further review of the existing Taxonomy criteria. This will include the DNSH criteria.

Next steps

The Delegated Regulation amends the Taxonomy Disclosures Delegated Act, Taxonomy Climate Delegated Act and the Taxonomy Environmental Delegated Act.

Although it has been approved by the Commission, the Delegated Regulation is close to but not yet a done deal. The next step in the process is review by the European Parliament and Council. There is a four month scrutiny period, which can be extended by another two months. Once the scrutiny period ends, the Delegated Regulation will take effect. For further information on this process more generally that has been published by the Council, see here.

Effective date

The simplification measures in the Delegated Regulation are slated to apply starting January 1, 2026, for the 2025 financial year. However, undertakings have the option to defer application by one year.

Source materials

• Delegated Regulation (provisional version)
• Templates and other annexes (provisional version)
• Commission FAQs
• Commission press release

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