As global awareness of climate change and environmental impact grows, the financial sector is under increasing pressure to shift capital toward sustainable activities. In response, the EU has introduced stringent frameworks, like the EU Taxonomy and new sustainability reporting requirements, to guide this transition.
Financial institutions now face critical obligations to demonstrate how their activities align with sustainability goals — a challenge that requires significant adjustments in reporting, transparency, and investment strategies. This article provides a concise overview of how these regulations impact key players in financial services — banks, asset managers, insurers, and large corporations — and outlines their reporting responsibilities.
Banks: Green Asset Ratio (GAR) Compliance
For banks, the Green Asset Ratio (GAR) is central to EU Taxonomy compliance. This ratio reflects the proportion of Taxonomy-aligned assets within a bank’s total lending and investment activities. Calculating GAR requires banks to assess which of their financing activities—such as loans and corporate bonds—meet the EU’s technical screening criteria. GAR serves as a key measure for stakeholders to calculate each institution’s commitment to sustainable financing, setting a higher standard for transparency across the sector.
Asset Managers: Green Investment Ratio (GIR) for Portfolio Alignment
Asset managers must report their Green Investment Ratio (GIR), which reveals the share of their managed portfolios invested in EU Taxonomy-aligned activities. The GIR calculation includes EU Taxonomy-aligned turnover, capital expenditure (CapEx), and operating expenditure (OpEx) from portfolio companies. This metric offers clients a clear view of sustainable investment exposure, aligning asset managers with investor demand for greener portfolios while meeting regulatory expectations for disclosure.
Insurers: Dual Reporting Responsibilities
Insurers, serving as both underwriters and institutional investors, have a dual responsibility. Insurers calculate the EU Taxonomy alignment within their portfolios, similar to asset managers, ensuring their investments support sustainable projects. Additionally, insurers must consider EU Taxonomy principles within their product offerings, specifically when developing policies related to climate resilience and environmental risk management. This dual approach reinforces the sustainability commitment across both the asset and product sides of insurance operations.
EU Taxonomy reporting obligations for financial products
The EU Taxonomy mandates reporting obligations for various financial products within the banking, credit, and investment sectors. The following products are subject to these disclosure requirements, as outlined in the final report of the EU Technical Expert Group on Sustainable Finance.
In-Scope Products
Key financial products that require EU Taxonomy disclosures include:
Pension and Asset Management Funds:
- UCITS Funds: Equity funds, exchange-traded funds (ETFs), and bond funds that fall under the UCITS framework.
- Alternative Investment Funds (AIFs): Includes real estate, private equity, SME loan funds, and infrastructure funds.
- Portfolio Management: Services provided under Article 4(1) of MiFID II.
- Pensions: Products like pension schemes (following IORP II standards) and pan-European personal pension products.
Insurance Products:
- Insurance-Based Investment Products (IBIPs): Investment-linked insurance products, such as life insurance policies.
Corporate and Investment Banking Products:
- Securitisation Funds
- Venture Capital and Private Equity
- Portfolio Management and Index Funds
Disclosure obligations for financial products based on sustainability claims
In alignment with the Sustainable Finance Disclosure Regulation (SFDR), the disclosure required for a financial product or offering is either mandatory or on a comply-or-explain basis, depending on the type of sustainability claim:
Article 9: Financial Products with a Sustainable Investment Objective
Examples of these products include green bonds, renewable energy funds, and impact investment funds, all of which have sustainability as a core objective. There’s a mandatory disclosure obligation, as financial products with a sustainable investment objective must complete EU Taxonomy disclosures indicating the specific environmental objectives the investments support (e.g., climate change mitigation). They must also report the percentage of the investment that aligns with EU Taxonomy criteria, providing clear data on sustainable contributions.
Article 8: Financial Products Promoting Environmental or Social Characteristics
This category includes products that promote environmental or social characteristics, either on their own or alongside other features. Examples are ESG-themed mutual funds, social bonds, and environmentally-focused pension funds. For these categories of products as well there’s a mandatory disclosure obligation about the EU Taxonomy alignment for the promoted environmental characteristics, with details on the extent of alignment to environmental objectives.
Article 7: Other Financial Products
This category includes all other financial products that do not have specific environmental or social objectives or are not explicitly marketed as sustainable. In this case, companies must either disclose their alignment with the EU Taxonomy (if applicable) or include a disclaimer stating, “The investment(s) underlying this financial product do not take into account the EU criteria for environmentally sustainable investments.” This comply-or-explain approach is aimed at providing transparency for investors, clarifying the product’s sustainability status if it does not align with EU Taxonomy criteria.
Enabling and Transitional Activities in the EU Taxonomy
In addition to product-level disclosures, the EU Taxonomy recognizes that certain economic activities play notable roles in the transition toward a sustainable economy. These activities, classified as enabling or transitional, are essential for meeting the EU’s environmental goals, even when the sectors involved may not yet be fully sustainable. Understanding these distinctions helps financial institutions identify and report on investments that, while not yet “green” in the strictest sense, still contribute positively to the EU’s sustainability objectives.
Enabling Activities
Enabling activities directly support other sectors in achieving environmental objectives.
To qualify as an enabling activity, it must meet two criteria:
- Not lead to asset lock-in that undermines long-term environmental goals.
- Demonstrate substantial positive environmental impact across their lifecycle.
Examples include manufacturing components for renewable energy or producing energy-efficient machinery.
Transitional Activities
Transitional activities are specific to climate change mitigation in high-emission sectors lacking low-carbon alternatives.
To qualify as a transitional activity, it must meet three criteria:
- Have greenhouse gas emissions aligned with best sector performance.
- Not hinder the development of low-carbon alternatives.
- Avoid carbon-intensive asset lock-in.
Streamlining EU Taxonomy Reporting with AI
It’s no secret that navigating the EU Taxonomy’s complex reporting requirements can be daunting for financial institutions’ compliance teams. But AI solutions, like Dydon AI’s TAXO TOOL, come to help with that by automating critical compliance tasks and streamlining the reporting workflow.
In fact, with AI-powered solutions, financial institutions can reduce manual effort, streamline compliance, and enhance the transparency and reliability of their EU Taxonomy disclosures, positioning themselves as leaders in sustainable finance.
With our EU Taxonomy software, it is possible to rapidly extract and analyze relevant data from documents, ensuring both accuracy and consistency across reports. Moreover, it can also automate complex calculations for carbon emissions and other technical criteria, making it easier to verify alignment with the EU Taxonomy.
Additionally, the TAXO TOOL can retrieve relevant risks by entering the project address, and access data from Munich Re to provide geolocation-based assessments of climate and geological risks during the Do No Significant Harm (DNSH) assessment. All while automating report generation and ensuring that financial institutions are audit-ready and can communicate their sustainability metrics effectively.
If this sounds appealing, schedule a free demo and see how our AI-powered solution can make EU Taxonomy reporting easier, faster, and more accurate!
