Following their joint consultation paper on taxonomy-related disclosures published in March 2021, the European Supervisory Authorities (ESAs) have now issued their final report containing draft Regulatory Technical Standards (the Draft RTS) with respect to the content and presentation of disclosures which will apply to investment funds falling within the scope of the detailed taxonomy-related disclosure obligations set down in Regulation (EU) 2020/852 (the Taxonomy Regulation).

The Draft RTS must now be considered by the European Commission which must decide whether to endorse them within three months of their publication date being 22 January, 2022.

If endorsed, the Draft RTS will be amalgamated with the finalised draft Regulatory Technical Standards under Regulation (EU) 2019/2088 (SFDR) (which are also currently being considered by the European Commission) (the SFDR RTS) into one Commission Delegated Regulation which will constitute a “single rulebook” for sustainability disclosures for financial products under SFDR and the Taxonomy Regulation.

While the high-level disclosures set down under the Taxonomy Regulation will begin to apply from 1 January 2022, the Draft RTS are expected to begin to apply from 1 July 2022, to coincide with the expected application date of the SFDR RTS.1

In this briefing, we outline some key takeaways from the Draft RTS for consideration by financial market participants.

Key Takeaways from the RTS

1. Application of disclosure obligations to Article 8 and Article 9 Green Funds

Consistent with the approach taken in their consultation paper, the ESAs have proposed that the detailed disclosure obligations arising under Article 6 of the Taxonomy Regulation only apply to Article 8 “green” funds which make sustainable investments with an environmental objective.

Further, the annex containing the pre-contractual disclosures applicable to Article 8 funds included in the Draft RTS requires Article 8 funds to identify whether or not they commit to investing in sustainable investments by way of a “tick-the-box” disclosure. If investing in sustainable investments, an Article 8 fund must now also confirm whether such investments contribute to (i) an environmental objective which is taxonomy aligned, (ii) an environmental objective not covered by the Taxonomy Regulation or (iii) a social objective.

In addition, the annex containing the pre-contractual disclosure applicable to Article 9 funds now requires all Article 9 funds to identify whether they are pursuing a social or environmental objective.

2. Do No Significant Harm (DNSH)

In what may have a significant impact for affected market participants, the ESAs have proposed in the Draft RTS that DNSH related disclosure requirements set down under the SFDR RTS will apply to all sustainable investments, including those which have been assessed as taxonomy-aligned under the taxonomy framework.

In-scope fund management companies will therefore need to:

(i) satisfy themselves that relevant investments meet the DNSH requirements under the applicable technical screening criteria set down in the delegated acts under the Taxonomy Regulation; and (ii) explain to investors in the pre-contractual disclosures how the indicators for adverse impacts on sustainability factors detailed in Annex I to the SFDR RTS (commonly referred to as the “PAI indicators”) are taken into account in such assessment.

There is some concern that the introduction of what is essentially a two-step test in assessing whether or not an investment does “no significant harm” may result in a smaller investment universe of taxonomy-aligned investments for impacted financial market participants.

3. Presentation of Taxonomy Alignment

The ESAs have proposed that two types of graphs are included in the pre-contractual disclosures and periodic reports for in-scope funds. In the pre-contractual disclosures, one pie chart must show the taxonomy alignment of the relevant portfolio including sovereign exposures while a second pie chart must show taxonomy alignment of the relevant portfolio excluding sovereign exposures. A similar approach has been taken for the periodic reporting disclosures.

For this purpose, the ESAs define “sovereign exposures” as any investment that results in “an exposure to central governments, central banks and supranational issuers”.

The ESAs have explained that this dual approach has been proposed by them because there is no appropriate methodology to assess the taxonomy alignment of sovereign exposures. However, as the inclusion of two graphs may potentially result in greater confusion for end investors, it will be interesting to see whether the European Commission endorses this approach.

4. Other Clarifications to Calculation Methodology for Taxonomy Alignment

The Draft RTS also make a number of changes to the methodology which must be used to calculate taxonomy alignment which had been proposed by the ESAs in their consultation paper.

These include the following:

(i) The list of asset classes which can be included in the numerator when calculating the taxonomy-alignment of a portfolio has been expanded. The revised list of asset classes now comprises of (i) equities, (ii) corporate bonds, (iii) green bonds issued under the future EU Green Bond Standard, (iv) other green bonds, (v) investments in real estate assets, (vi) investments in infrastructure assets, (vii) investments in securitisation positions and (viii) investments in other financial products falling within the scope of Article 5 and Article 6 of the Taxonomy Regulation;

(ii) Turnover must be used as the default key performance indicator (KPI) when calculating the taxonomy alignment of investments in non-financial undertakings for pre-contractual disclosures. Capital expenditure (Capex) or operational expenditure (Opex) may be used as an alternative KPI if considered more appropriate taking into account the features of the relevant fund. The Draft RTS also clarify that the periodic reports must disclose the taxonomy-alignment of the relevant portfolio using all three KPI for non-financial undertakings; and

(iii) Derivatives cannot be included in the numerator when calculating the taxonomy-alignment of a portfolio. However, the ESAs do note that the “issue may be reconsidered in the future once there may be more evidence in this area to allow a different conclusion”.

5. Funds Which Contribute to Environmental Objectives Not Covered by the Taxonomy Framework

The Draft RTS recognise that an in-scope fund which contributes to an environmental objective other than an environmental objective listed in Article 9 of the Taxonomy Regulation will still fall within the scope of the Taxonomy Regulation required disclosures. The template pre-contractual disclosures contained in the Draft RTS now include a section entitled “What is the minimum share of sustainable investments with an environmental objective that are not aligned with the EU Taxonomy” to address this.

6. Consideration of Principal Adverse Impacts

Pursuant to the Draft RTS, where an Article 8 fund or an Article 9 fund considers principal adverse impacts of investment decisions on sustainability factors (PAI), this must be disclosed in the template pre-contractual disclosures from 30 December 2022, which will satisfy the disclosure obligations set down in Article 7 of the SFDR itself.

Article 6 funds (i.e. non-ESG funds) which consider PAI will also be required to address PAI disclosure requirements under Article 7 of the SFDR from 30 December 2022. On the basis that an Article 6 fund will not be required to produce an ESG-specific annex, this disclosure will be contained in the prospectus/supplement.

The Draft RTS have also helpfully clarified that an Article 9 fund is not automatically required to consider PAI by virtue of its classification.

It will be interesting to see whether many Article 8 funds which do not make sustainable investments choose to rely on consideration of PAI in order to be capable of distribution by EU investment firms to investors who have indicated sustainability preferences from 2 August 2022 under the revised MiFID suitability assessment rules.


Certain provisions of the Draft RTS proposed by the ESAs will be of some concern for affected financial market participants, in particular, the requirement to consider the PAI indicators in addition to the DNSH technical criteria set down in the taxonomy framework when assessing whether an investment does significant harm to environmental or social objectives. Impacted financial market participants are also likely to have reservations that disclosing two different pie charts in the pre-contractual disclosures (including and excluding sovereign exposures respectively) may serve to confuse rather than educate retail investors. The significant data challenges faced by financial market participants in complying with these disclosure obligations also remain.

However, the Draft RTS have also provided welcomed clarity in certain aspects of the Taxonomy Regulation including finalised guidance on the calculation methodology which should be used to calculate the taxonomy-alignment of a fund’s portfolio, giving financial market participants a clearer pathway for preparing for compliance with the detailed taxonomy disclosure obligations from 1 July 2022.