Europe

EU Taxonomy Delegated Acts “Ignore Scientific Advice”

Consultation respondents diverge over technical screening criteria for companies in transition. 

A coalition of NGOs, shareholder associations and sustainable investment associations has called for the European Commission’s (EC) planned sustainable taxonomy to be “rooted in climate and environmental science”. 

In response to a consultation on the draft delegated acts (DA) that provides much of the initial detail for the Sustainable Finance Taxonomy Regulation, the 130-strong group said the current text “ignored or weakened the Technical Expert Group’s (TEG) scientific advice for several activities”. 

The TEG was a group of 35 experts asked by the EC to provide technical input into the classification and methodologies to support its legislative proposals for sustainable finance. The group commenced its work in July 2018. 

“Investors and civil society deserve clarity on what is effectively contributing to climate change mitigation and adaptation, and what is not. This is why it is paramount that the EU Taxonomy remains science-based and insulated from political pressure. The draft DA departs from the TEG’s recommendations – for instance, by including all biogas and by contradicting the Commission’s own assessment on bioenergy,” Maria van der Heide, ShareAction’s Head of EU Policy, told ESG Investor. 

The European Union’s (EU) taxonomy, which will be implemented from 2022, aims to funnel more investments into sustainable companies and projects, by clarifying and identifying what can be included in a green investment vehicle, in order to encourage a faster transition to a low carbon economy. 

Included in the 10 key areas for improvement highlighted by the coalition is the recommendation for mitigation thresholds to be tightened at least every five years, as proposed by the TEG. Mid-stream oil and gas is also excluded and should not be reincluded,” the coalition said. 

The consultation on the DAs closes Friday. The two delegated acts specify the technical screening criteria (TSC) for the taxonomy’s first two environmental objectives (climate change adaptation and climate change mitigation). The acts are due to be adopted by December 31, with the taxonomy applicable from January 2022. The delegated acts for the taxonomy’s other four objectives (water, circular economy, pollution control and biodiversity) are scheduled to be adopted by the end of 2021.

Companies in transition 

Respondents to the consultation were divided over the taxonomy’s inclusion of sectors in transition away from high greenhouse gas emission levels, with some warning that exclusion could limit firms’ access to investors and preventing them from securing billions of dollars in funding.  

The Taxonomy Regulation should ensure that “‘transitional activities’ have their own dedicated TSC to reflect their transitional nature”, the International Association of Oil & Gas Producers (IOGP) noted in its response. 

An industry such as natural gas will “decarbonise over time”, the IOGP noted, and this should be reflected in the taxonomy. Rather than setting immoveable boundaries which define transitional companies as either green or not according to today’s numbers, the IOGP said a sliding scale with more gradual barriers would be most effective. 

“The report was drafted, in a way, like we need to transition tomorrow. This is a journey and we need these transitional activities,” Kamila Piotrowska, IOGP’s Senior Manager for Policy Strategy, told Reuters. 

To meet disclosure requirements, the IOGP has asked the Commission to “to consider extending the timeframe for the implementation of the disclosure obligation or retain the principle of one or two pilot years”. 

Brown companies incompatible? 

Unlike the IOGP, The Green Finance Observatory (GFO) said that a green taxonomy should not include a wide range of transitional, or ‘brown’, activities, such as livestock production, manufacture of cement, metals and plastics, electricity generation from oil and natural gas, and road-based freight services.  

Observing that the purpose of the taxonomy is to identify and list green activities that would benefit from an eco-label, the Brussels-based NGO said inclusion of “notoriously” brown economic activities would slow down required structural changes. “Including them is also incompatible with our remaining carbon budget,” it said.  

The GFO also warns of the leakage risks currently associated with underground carbon sequestration, one of the technical screening criteria for a number of transitional activities. 

ShareAction and its civil society coalition expressed support for the development of an unsustainable taxonomy which it noted “is crucial to reliably identify risky sectors and accelerate their transition”. 

Aligning taxonomy with EU’s net-zero pledge 

In an open letter to the Commission on December 3, 123 scientists from 27 countries said the Taxonomy Regulation has made a “critical oversight” by omitting certain TEG suggestions, which would undermine the EU’s target to reach net-zero greenhouse gas emissions by 2050. 

The EU’s current target is to class gas-fuelled power plants as sustainable if they meet an emissions limit of 100 grams of CO2 equivalent per kilowatt hour. But the scientists pointed out the absence of any mention of this limit being lowered over time in order to reach net-zero emissions by 2050.  

“Despite the utmost importance of tightening technical screening criteria over time, the 529 pages of the draft delegated act on the Taxonomy and its annexes […] omit any references to it. We assume this omission can only be an unfortunate administrative oversight in these extraordinary times that, however, needs urgent correction, the letter said. 

Reversal of forest biomass inclusion 

In its response to the consultation, Reclaim Finance called on the commission to reverse the draft delegated acts’ inclusion of all types of forest biomass as a sustainable energy source.  

The French NGO said the current position “contradicts all recent authoritative scientific research” as well as the Commission’s own impact assessment.  

Noting that some forms of forestry biomass extraction can increase atmospheric levels of carbon dioxide, Reclaim Finance said all bioenergy feedstocks that raise emissions levels should be excluded from the taxonomy.  

Its submission also argued that hydrogen manufactured from non-renewable power sources should be excluded. 

The EU’s transparency regime 

The Taxonomy Regulation is only one element of the EU’s transparency regime, and will operate in tandem with the Sustainable Finance Disclosure Regulation (SFDR) and the Non-Financial Reporting Directive (NFRD). 

Level one of the SFDR is set to be released on March 10 2021, but Level 2 measures have been delayed until “a later stage” the Commission has since confirmed 

Earlier this month, EU Commissioner for Financial Services Mairead McGuinness said reform of the NFRD next year – to help integrate sustainability throughout the financial value chain – is “crucial” in order to strengthen the foundation for sustainable investment.  

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, published its consultation paper on its draft advice to the EC on Article 8 of the Taxonomy. The regulator’s proposals are focused on ensuring disclosure obligations implemented by the Taxonomy fall within the scope of the NFRD. ESMA will deliver its final advice to the Commission by February 28 2021.  

Separately, the Alliance for Corporate Transparency today issued recommendations for the reform of the NFRD to improve the comparability and relevance of corporate disclosures.  

The group, backed by advisors including Oxfam, ShareAction, CDP and CDSB, called for expansion of the scope of the NFRD, greater alignment of non-financial reporting with annual reports, greater clarity on double materiality and more integration of reporting requirements on governance and accountability.  

The Alliance also signalled its support for a European Parliament report which is expected to call for far-reaching reform of corporate reporting obligations. The EC is expected to adopt the delegated act on NFRD entity reporting under Article 8 of the Taxonomy Regulation by June 1 2021. 

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