EU Taxonomy Article 8 Disclosure Requirements

The European Union’s Taxonomy Regulation is a classification system that establishes criteria for environmentally sustainable economic activities. This framework is designed to guide investors and companies by creating a shared understanding of sustainability, which increases market transparency and prevents “greenwashing.” Within this regulation, Article 8 creates a legal obligation for certain companies to disclose how their business activities align with the Taxonomy.

These disclosures provide investors and the public with consistent and comparable data on the environmental performance of corporations, making them a mechanism for translating the Taxonomy’s classification system into practical corporate reporting.

Entities Subject to Article 8 Disclosures

The reporting obligations of Article 8 apply to a specific set of large European undertakings. Initially, these requirements targeted companies under the Non-Financial Reporting Directive (NFRD). The scope is expanding with the Corporate Sustainability Reporting Directive (CSRD), which is replacing the NFRD and broadening the range of companies required to report.

The CSRD will eventually include all large companies and all listed companies, except for listed micro-enterprises. A large company is defined by meeting at least two of the following three criteria:

• More than 250 employees
• A balance sheet total of over €25 million
• A net turnover of more than €50 million

While reporting requirements were phased in, companies are now required to provide full reporting on their alignment with the Taxonomy. This involves detailed data collection and analysis capabilities.

Key Performance Indicators for Non-Financial Undertakings

For non-financial undertakings, Article 8 mandates the disclosure of three Key Performance Indicators (KPIs) to measure their engagement in sustainable activities: Turnover, Capital Expenditure (CapEx), and Operating Expenditure (OpEx).

The Turnover KPI measures the proportion of a company’s net turnover derived from products or services associated with Taxonomy-aligned economic activities. The numerator is the revenue from these sustainable products or services, while the denominator is the company’s total net turnover under applicable accounting standards.

The Capital Expenditure KPI focuses on investments in long-term assets. It is calculated as the proportion of a company’s total CapEx related to assets or processes associated with Taxonomy-aligned activities. This KPI signals the extent to which a company is investing in greening its asset base and future operations.

The Operating Expenditure KPI captures the proportion of direct, non-capitalized costs related to the day-to-day maintenance of assets and processes associated with Taxonomy-aligned activities. The numerator includes costs like research and development, building renovation, and short-term leases that support sustainable operations, while the denominator is the total operating expenditure.

Key Performance Indicators for Financial Undertakings

Financial undertakings have a distinct set of KPIs under Article 8 that reflect their role in financing the economy. For credit institutions, the primary KPI is the Green Asset Ratio (GAR). The GAR measures the proportion of a bank’s assets, including loans and debt securities, that are invested in Taxonomy-aligned economic activities, compared to its total covered assets.

Asset managers must disclose the proportion of their investments in Taxonomy-aligned economic activities for the portfolios they manage. This KPI is calculated by taking the market value of Taxonomy-aligned investments and dividing it by the total market value of all assets under management within a specific fund.

Insurance and reinsurance undertakings report KPIs for both investment and underwriting activities. The investment KPI is similar to that of asset managers, showing the proportion of their portfolio that is Taxonomy-aligned. For non-life underwriting, the KPI measures the extent to which their insurance policies cover Taxonomy-aligned activities, calculated based on gross premiums written.

Determining Taxonomy Alignment

Before calculating any KPI, a company must determine if an economic activity qualifies as “Taxonomy-aligned” through a three-step assessment.

First, the activity must make a “Substantial Contribution” to at least one of the six environmental objectives defined in the Taxonomy Regulation. An activity must meet specific Technical Screening Criteria (TSC) to prove its contribution. The six objectives are:

• Climate change mitigation
• Climate change adaptation
• The sustainable use and protection of water and marine resources
• The transition to a circular economy
• Pollution prevention and control
• The protection and restoration of biodiversity and ecosystems

Second, the activity must “Do No Significant Harm” (DNSH) to any of the other five environmental objectives. This prevents a company from claiming an activity is sustainable if it achieves one goal at the expense of another. For example, a renewable energy project cannot be aligned if it severely damages local biodiversity without proper mitigation.

The final requirement is compliance with “Minimum Safeguards,” which ensures the company adheres to social and governance standards. This assessment is based on the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, covering topics like labor rights, human rights, and anti-bribery.

Preparing and Reporting Disclosures

After analyzing its activities and calculating its KPIs, a company must compile and report this information using a standardized format. The Disclosures Delegated Act provides mandatory reporting templates that companies must use to present their KPI data.

These templates also require qualitative information explaining the basis for the calculations and the methodologies used to assess alignment. This includes details on how the Substantial Contribution and DNSH criteria were applied.

The completed disclosure must be included as part of the non-financial statement within the company’s annual management report. This placement ensures that sustainability performance is presented alongside financial performance. The report is then made public, allowing investors, regulators, and other stakeholders to use the data to inform their decisions.