FESE Position Paper on the Treatment of Derivatives in the Final Draft RTS on SFDR Taxonomy-related product Disclosures

In the current RTS proposal, the Taxonomy alignment of certain specified financial products needs to be expressed via a ratio, namely the number of assets in Taxonomy-aligned activities over total assets. Derivatives may not be included in the numerator on the basis that there is not yet a reliable methodology for assessing their Taxonomy alignment but they must be included in the denominator as part of the total assets of the product or portfolio.

We fear that this proposal incorrectly disincentivises the use of derivatives in the affected financial products, since any exposures to derivatives could only ever contribute negatively to the Taxonomy-alignment ratio. In order to have a high percentage alignment with the Taxonomy, companies may decide not to opt for derivatives.

Given the substantial financing needed for Europe’s green transition, it is counterproductive to disincentivise the use of these instruments by market participants. Derivatives play a central role in lowering market-based funding costs for actors in the real economy thanks to their risk-hedging function. Ignoring them would undermine Europe’s broader climate and sustainability goals.

We recommend, therefore, that the calculation methodology be amended to include derivatives in the numerator of the ratios. This would recognise the role these instruments play in securing market-based financing for Taxonomy-aligned investment activities.

If this is not possible, derivatives should be removed completely from the ratios, but just as an interim solution.