Qualitative disclosures made by financial institutions to comply with EU taxonomy laws are “characterised by significant shortcomings”, according to an assessment released this week by Danish regulator Finanstilsynet (FSA).
The FSA concluded that most of the qualitative information provided by reporting entities was “too general” and described general sustainability efforts rather than how they were aligned to the EU taxonomy.
The regulator said reporting of quantitative information was satisfactory despite some gaps, but “there is a greater need for improvements in relation to the qualitative information”.
The FSA has been one of Europe’s most active regulators on sustainable finance issues. In March, it publicly named three asset managers for “significant deficiencies” in the controls and processes of their ESG funds.
It has also been criticised by Danish manager Jyske Invest for allegedly enforcing ESG fund naming rules “more stringently” than the European Securities and Markets Authority (ESMA).
In the latest report, the FSA acknowledged that taxonomy disclosure requirements would likely be reduced by the ongoing sustainability Omnibus simplification initiative. However, it expects that the requirements for qualitative reporting “will be maintained”.
An area of concern for the FSA was that disclosures based on the current rules did not contain sufficient information on whether, when and how reporting entities engaged in dialogue with customers and counterparties on taxonomy alignment.
Financial institutions should disclose details on the purpose of any dialogue, such as whether it included taxonomy-related advice, and the type of stakeholders that have been engaged, the regulator said.
It added that entities did not provide sufficient information on how their business strategy and product design were aligned to the EU taxonomy.
While some institutions said sustainability was integrated into their strategy, they did not explain how this worked in practice in relation to the EU taxonomy. Similarly, there was a “general tendency” for companies to describe their products in terms of sustainability in general and not specifically in terms of the EU taxonomy, the FSA said.
It also noted that readability was an issue, criticising unclear subheadings and report structures.
Separately, the FSA said no entity complied with the expectation that financial conglomerates disclose taxonomy alignment metrics for each separate business line including asset management, banking, insurance and reinsurance.
The regulator said conglomerates would need to calculate and disclose KPIs in the form of a weighted average for the respective business segments, including revenue and capital-based KPIs for taxonomy-aligned activities, taxonomy-eligible activities and non-eligible activities for each of the environmental objectives.
It found that financial companies reported an average 4.2 percent share of assets aligned to the EU taxonomy in 2024, an increase of 0.4 percentage points compared to the previous reporting year.
EU banks, but not other types of financial institutions, reported a taxonomy alignment of 2.47 percent in 2024.
The proportion of Danish financial sector assets that were eligible but not aligned to the taxonomy – meaning they contribute to a particular green activity but do not meet the technical performance thresholds and other safeguards – increased from 33.6 percent in 2023 to 34.5 percent in 2024.
The assessment was based on a survey of 20 financial institutions operating in Denmark.