Europe

EC Sustainable Finance Package Prompts “Cautious Optimism”

Delayed separate framework for ‘brown activities’ expected later this year.

Details about the planned European Taxonomy, published yesterday alongside a raft of related measures supporting the European Commission’s efforts to drive investment to sustainable activities, have been broadly welcomed.

“Our overall position [on the Taxonomy Regulation] is one of cautious optimism,” said Alyssa Heath, Senior Lead of Sustainability Reporting and Policy for the Principles for Responsible Investment (PRI), speaking at the Sustainable Investment Forum Europe today.

“There are definitely parts where we think it could be better, but it also could have been a lot worse,” she said.

One of the key areas for potential future change is the current exclusion of agriculture, nuclear and gas from the Taxonomy, due to ongoing debate as to how, and to what extent, these carbon-intensive industries can be classified as sustainable.

“We will have to wait until Q4 2021 for the Commission to present a new legislative proposal for rules to establish technical screening criteria for gas, nuclear and other technologies in the energy sector outside of the limits imposed by the procedures set in the Taxonomy Regulation,” said Julia Vergauwen, ESG Funds Lawyer at Linklaters.

Under intense lobbying pressure, the Commission has essentially deferred it decision on the inclusion of these sectors.

“The Commission is thinking about creating a separate framework recognising the transition potential of certain industries, such as gas and nuclear, and that will be decided in the next few months,” said Sven Gentner, Head of the EC’s Unit for Asset Management, also speaking at the event.

“Common language” for investors

The EU Taxonomy’s Climate Delegated Act, which will be formally adopted from May month-end, defines a “common language” for investors as to which economic activities fall under two of the EU’s six environmental objectives: climate change adaptation and climate change mitigation. It will cover the economic activities of 40% of listed companies in sectors responsible for almost 80% of direct greenhouse gas (GHG) emissions in Europe, the EC said.

The reporting parameters for all six of the amending Delegated Acts have been further clarified, the EC explained, noting that advisers now have a responsibility to “obtain information about their clients’ sustainability preferences” alongside a traditional suitability assessment.

The six Delegated Acts cover fiduciary duties, investment and insurance advice on: climate change mitigation, climate change adaptation, water and marine resources, transition to a circular economy, pollution prevention and biodiversity.

The technical screening criteria for these Acts follows scientific advice from the Technical Expert Group (TEG) on sustainable finance.

The Taxonomy’s Delegated Act for climate was originally due to be published in December 2020, with the following clarifications covering the remaining environmental activities enforced from January 2022.

In December, a coalition of NGOs, shareholder associations and sustainable investment associations called for the Taxonomy to be “rooted in climate and environmental science”, noting that the draft criteria didn’t follow recommendations provided by TEG.

Nathan Fabian, Chair of the Platform on Sustainable Finance, said the Platform will study the existing adopted criteria “to understand where they deviate from expert recommendations, and the evidence used to support these changes”.

“Where the Platform finds that scientific evidence does not support certain criteria, it will make recommendations to revise them, in keeping with its mandate,” he said.

This follows the enforcement of the EU’s Sustainable Finance Disclosure Regulation (SFDR) Level 1, which asks asset managers to sort their ESG funds into three progressively greener categories.

The Taxonomy’s technical screening criteria will give asset managers better access to the information they need from corporates when complying with SFDR’s Level 2 regulatory technical standards (RTS) from next year. Level 2 asks asset managers to disclose the underlying evidence behind their Level 1 categorisation decisions.

Future expansion

The details provided in the EC’s Sustainable Finance Package have provided much-needed clarity on the activities that can be invested in by sustainable investment vehicles. Over time, the gaps will be filled in as demand and priorities change.

The Taxonomy is a “living document”, Gentner noted, adding that the Delegated Acts will be adapted and expanded as goals become more ambitious, aligning with scientific insights and political goals.

“The Taxonomy can’t do everything right away,” he said. “The specific purpose [of these Delegated Acts] is to identify specific activities that substantially contribute to our [climate objectives]. There are other environmental activities not yet included, particularly when it comes to the transition, which there will be room for in the future.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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