What is the EU Taxonomy?
The EU Taxonomy is the EU's dictionary of sustainable economic activities. The Taxonomy describes which investments are considered green. This promotes transparency, counters greenwashing and drives the shift of capital towards the sustainable economy of the future; a development that Triodos wholeheartedly supports. However, Triodos Bank is against the classification of natural gas and nuclear power as 'green transition techniques'. This puts the added value of the Taxonomy at risk, evolving it from a science-based dictionary to a controversial tool that actually encourages greenwashing. In addition, Triodos Bank strongly supports the development of a taxonomy of harmful activities, which is crucial to reliably identify risky sectors and accelerate their transition.
Six environmental objectives have been identified within the EU Taxonomy. The Taxonomy Delegated Acts contain technical screening criteria to further describe which economic activities fall under these objectives. A distinction is made between Taxonomy-eligible and Taxonomy-aligned (see the figure on the next page).
What does Triodos Bank need to disclose?
As a credit institution, Triodos needs to report Taxonomy-alignment in the form of the green asset ratio (GAR). The GAR shows the proportion of a credit institution’s assets that are Taxonomy-aligned economic activities (the numerator) as a proportion of total covered assets (the denominator). As a bank we rely on client information on the EU Taxonomy to determine our GAR.
For reporting year 2022, Triodos Bank will only report on Taxonomy-eligibility for climate change mitigation (CCM) and climate change adaptation (CCA) as we use information provided by clients over reporting year 2021. The criteria for the remaining four environmental objectives under the Taxonomy will likely be finalised only in 2023. Triodos Bank will be required to report on Taxonomy-alignment for CCM and CCA as of reporting year 2023.
Guidance provided by the EU has introduced a distinction between mandatory and voluntary reporting on the EU Taxonomy. For the mandatory reporting, eligibility-related disclosures of financial undertakings are to be based on actual information obtained bilaterally from counterparties. We include the GAR for our Triodos Investment Management activities on a voluntary basis.
The six environmental objectives of EU Taxonomy and four conditions that need to be met to be Taxonomy-aligned
Scoping considerations: most of our sustainable lending portfolio falls outside the EU Taxonomy scope
We acknowledge the positive development of the EU Taxonomy but also strongly recognise that in the first years of the phased-in approach, a significant part of our portfolio falls outside the scope of the EU Taxonomy even though we believe our entire portfolio reflects our mission and frontrunner position as a values-based bank. The sustainable objectives currently only cover two out of six environmental objectives for banks in reporting year 2022. Triodos Bank has significant exposures in sectors such as healthcare, education and arts and culture, which are currently out of scope for determining Taxonomy-eligibility within these two objectives. Additionally, Triodos Bank has a high exposure to SMEs within its banking activities, but also in the alternative investment funds which mainly consist of unlisted SMEs. These are significant exposures not covered under the current Taxonomy mandatory reporting which only include large corporations subject to the Non-Financial Reporting Directive (NFRD).
Triodos Bank N.V. 2022 Taxonomy-eligibility figures
39.6% of Triodos Bank’s covered assets can be considered Taxonomy-eligible (according to mandatory disclosure).
The first table shows the assets excluded for the GAR calculation and the assets covered for the GAR calculation. Per 31 December 2022, the gross carrying amount of total assets is EUR 16.1 billion. Of these total assets, EUR 12.0 billion (74.5%) is included in the denominator (our covered assets). Of the covered assets, EUR 4.8 billion, or 39.6% is Taxonomy-eligible according to our mandatory disclosure. EUR 4.1 billion, or 25.5% of total assets, are excluded from the GAR calculation. The excluded assets relate to cash exposures to central banks and exposures to sovereigns.
This eligibility percentage seems low when considering our mission. This mainly results from the high exposure to SMEs that are not obliged to disclose Taxonomy-related information. EUR 5.5 billion of the EUR 6.2 billion assets in the denominator (45.4% of the covered assets and 33.8% of total assets) refer to exposures to non-financial counterparties that are not subject to the NFRD disclosure obligations and are therefore not obligated to report on the EU Taxonomy. This is mainly driven by SMEs and UK exposures which fall outside the scope of the EU Taxonomy.
The main driver of our Taxonomy-eligibility score is our exposure to mortgages which relate to real-estate activities and are eligible for climate change mitigation. EUR 137 million (59.1%) of the non-financial corporations subject to NFRD disclosure obligations are Taxonomy-eligible. These companies are mainly active in renewable energy, engineering activities and real estate. Other eligible activities are driven by specialised lending to local governments and green bonds. The final category of eligible assets relates to residential and commercial immovable property that was obtained through possession. These assets are linked to real estate and are therefore considered Taxonomy-eligible. We expect the Taxonomy-eligibility ratio to increase significantly over the coming years when the scope of the EU Taxonomy expands to other environmental objectives and clients increase their disclosures on the EU Taxonomy.
| 20221 | 20211 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance sheet items | Gross carrying Amount | Of which: | Taxonomy-eligibility % | Gross carrying Amount | Of which: | Taxonomy-eligibility % | |||||||
Total assets2 | 16,142 | 4,770 | 29.6% | 16,554 | 3,815 | 23.0% | |||||||
Of which: Assets excluded for GAR calculation | 4,111 |
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| 5,682 |
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Sovereigns3 | 1,480 |
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| 1,354 |
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Central banks exposure | 2,631 |
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| 4,328 |
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Of which: Assets covered for GAR Calculation | 12,031 | 4,770 | 39.6% | 10,872 | 3,815 | 35.1% | |||||||
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| 20221 | 20211 | |||||||
|---|---|---|---|---|---|---|---|---|---|
Assets covered for GAR Calculation | Gross carrying Amount | Of which: | Taxonomy-eligibility % | Gross carrying Amount | Of which: | Taxonomy-eligibility % | |||
Total assets covered for GAR Calculation | 12,031 | 4,770 | 39.6% | 10,872 | 3,815 | 35.1% | |||
Of which: GAR - assets in numerator | 5,848 | 4,770 | 81.6% | 4,987 | 3,815 | 76.5% | |||
Financial corporations | 877 | 55 | 6.3% | 758 | 30 | 4.0% | |||
Non-financial corporations subject to NFRD disclosure obligations | 232 | 137 | 59.1% | 239 | 18 | 7.5% | |||
Households | 4,601 | 4,460 | 96.9% | 3,811 | 3,636 | 95.4% | |||
Specialised lending to local governments | 132 | 114 | 86.4% | 172 | 123 | 71.5% | |||
Collateral obtained by taking possession | 5 | 5 | 100.0% | 7 | 7 | 100.0% | |||
Of which: Assets excluded from the numerator for GAR calculation (covered in the denominator) | 6,183 |
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| 5,885 |
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In 2021, Triodos Bank disclosed eligible GAR on a voluntary basis as no counterparty information was yet available. In 2022, we report on the eligibility of our counterparties that are in scope by collecting information that is either publicly disclosed or collected from our clients bilaterally. We therefore do not have a separate voluntary disclosure for our on-balance exposures. Triodos Bank does however disclose the eligibility of the funds under management within Triodos Investment Management on a voluntary basis. EUR 236 million funds under management (excluding Private Banking and Stichting Hivos Triodos) are Taxonomy-eligible under our voluntary disclosure, which amounts to 24.8% of the corporates subject to NFRD disclosure within the funds under management and 4.8% of total funds under management.
The 2022 eligibility ratio is mainly driven by holdings in the energy and utility industries. Only 19.4% of funds under management are exposures to corporates subject to NFRD disclosure obligations as a significant part of the portfolio is located outside the EU. Variations in the eligibility percentage compared to 2021 can be explained by a change in data provider of EU Taxonomy information and in shifting from using estimates to determine Taxonomy-eligibility to an increased use of data provided by investees. Actual EU Taxonomy figures may be lower than the estimated figures from last year. Nonetheless, all investments of Triodos Investment Management are sustainable investments as defined by Article 2(17) of the EU SFDR. A subset of these investments has EU Taxonomy-related objectives as core focus of the funds. Other investments have non-EU Taxonomy environmental objectives or social objectives.
More information on how we applied the EU Taxonomy reporting, the assumptions we made and the limitations that we experience are disclosed in Appendix VII, which also contains the full reporting table.
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|---|
Triodos Investment Management voluntary disclosure | Net asset value | Of which: | Taxonomy-eligibility % | Net asset value | Of which: | Taxonomy-eligibility % | |||
Total funds under management1 | 4,901 | 236 | 4.8% | 5,401 | 289 | 5.3% | |||
Of which: debt securities | 2,243 | 72 | 3.2% | 2,531 | 59 | 2.3% | |||
Of which: equity instruments | 2,594 | 152 | 5.9% | 2,530 | 229 | 9.1% | |||
Total funds under management - Corporates subject to NFRD disclosure obligations | 953 | 236 | 24.8% | 810 | 289 | 35.6% | |||
Of which: debt securities | 278 | 72 | 25.7% | 179 | 59 | 33.0% | |||
Of which: equity instruments | 638 | 152 | 23.8% | 632 | 229 | 36.2% | |||
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Compliance with the Taxonomy regulation: how the Taxonomy fits into Triodos Bank
This section elaborates on the compliance with the EU Taxonomy within our business strategy, product design processes and engagement with clients.
Sustainability is a core value of Triodos Bank and is integrated into nearly all our activities. Since its founding, Triodos Bank has been aware of the impact that its investment and finance decisions have on society, both positive and negative. There is no such thing as a neutral financial exposure, allocating capital (by investing or lending) should be done consciously considering both the environmental and social impact. We will therefore actively comply with and follow applicable sustainable finance regulations. However, we also recognise that at least in the implementation phase, these regulations still have their serious limitations: only two out of the six objectives are in place and there is no social taxonomy. The political decision to include nuclear and gas as sustainable activities has introduced uncertainty. As they stand, these regulations are not leading our business strategy.
The following procedures are in place at Triodos Bank to determine whether underlying activities (of financial products, loans, etc.) qualify as sustainable. Within our business activities, our Lending criteria and Transition Theme criteria screen for positive social, environmental, and cultural impact. Our Minimum Standards set out the absolute minimum requirements of any economic activity we lend to or invest in. The Engagement and Stewardship policy explains how Triodos Investment Management engages with their counterparties to improve the positive impact made and reduce the negative impact, whether that be environmental or social. These policies have been created from a Triodos Bank perspective and do not necessarily follow the technical screening and do no significant harm (DNSH) criteria as set by the EU Taxonomy in this stage.
As sustainability is embedded in the DNA of Triodos Bank, each department is responsible for ensuring sustainability is incorporated within the design and functioning of our products. An interdisciplinary team within Group Finance performs the EU Taxonomy analysis and reporting for Triodos Bank N.V. under the responsibility of the Group Director Finance and in strong collaboration with the Legal team and other teams implementing sustainable finance regulations. We maintain a dynamic methodology document explaining our reporting decisions and how underlying activities qualify as environmentally sustainable. A condensed version is published on the website of our 2022 annual report.
In the second year of EU Taxonomy reporting we have collected EU Taxonomy-related information from our counterparties or their parent companies that were obliged to report under the NFRD. Triodos Bank periodically collects information from clients on impact data to inform our stakeholders about what happens with their money. As a result of the EU Taxonomy, the requests for information to our clients have increased and will continue to do so in the future. Triodos Bank will remain in discussion regarding the feasibility of the data collection among SMEs (which are currently not yet in scope for Taxonomy reporting). In the future, we will need to review our pre-contractual documents and periodic reports to collect information relevant for the EU Taxonomy.
Data collection will have to be integrated in relevant processes such as the loan origination process for general and project-specific lending, and loans and mortgages documentations for household mortgages or building renovation loans. Currently, relevant EU Taxonomy information for existing and new counterparties is collected manually due to the small number of business clients in scope.
We recognise the disclosures are mainly created from a Triodos Bank perspective. In the future, our business strategy, product design processes and engagement with clients and counterparties may need to be more clearly linked to the EU Taxonomy when we have both more clarity and guidance on the EU Taxonomy from regulatory bodies and when we have increased insights from the market and stakeholders on how the EU Taxonomy is applied.