Europe

Gas and Nuclear “Holding Taxonomy Hostage”

Lobbying efforts fuel delay to first Delegated Act, potentially holding up EU’s green regulatory timetable.

Following a request by the European Council for more time to consider the inclusion of gas and nuclear energy within the Taxonomy Regulation’s Climate delegated act (DA), industry experts are fearful their inclusion will undermine its credibility.

The DA, formally adopted in June, contains the technical screening criteria for two of the taxonomy’s six environmental objectives: climate change adaptation and mitigation. The two-month delay risks pushing back the DA’s current January 2022 application date.

In April, the European Commission announced that nuclear and natural gas power generation would not be included in the Taxonomy Climate DA, but would feature in a supplementary DA covering other more carbon-intensive activities, such as agriculture and manufacturing. A proposal for the latter DA is expected sometime this year following a separate review process.

This announcement prompted increased lobbying from nuclear and gas companies, with a number of EU Member States since saying they do not want to approve the Taxonomy Climate DA without first reviewing the proposal for the supplementary DA.

This week’s formal request for more time to review the Climate DA by the Council suggest consensus is still not in sight. The European Council is made up of the heads of state or government of all EU countries, the European Council President, and the European Commission President. It is a core decision-making body of the European Union alongside the European Parliament.

Politicisation of the taxonomy

Reclaim Finance, a non-governmental organisation, previously published a report outlining how gas and nuclear companies, such as Shell, bp and EDF, spent €85 million lobbying against their exclusion from the Taxonomy Climate DA.

The resulting extension is an example of the “high politicisation of the taxonomy, at the expense of science”, according to Paul Schreiber, a Regulatory Campaign Manager at Reclaim Finance. “The delay is giving much more leverage to gas and nuclear advocates. They are now holding the whole taxonomy hostage,” he told ESG Investor.

The World Wide Fund for Nature (WWF) and more than 150 civil society groups recently published an open letter to European institutions, calling for fossil gas not to be included in the taxonomy. As well as Reclaim Finance, signatories included Greenpeace, Birdlife and Transport and Environment.

“If the extension allows for further time to address the position of nuclear and gas, and for the differing views of a number of Member States to be reconciled, then it could be a positive step,” countered Aonghus Heatley, Senior Associate of Regulation for law firm Fieldfisher. However, he noted that the debate is “unlikely” to be resolved within a two-month period.

Ultimately, the delay can be viewed as Europe “kicking the can down the road”, causing further uncertainty for European investors and companies, Heatley added.

It is possible that, despite the extension, the DA can be enforced in time for January 2022 enforcement, provided no objections are raised in the interim, according to law firm Linklaters.

If there are objections, it will not enter into force and the Commission will be required to redraft the legislation, Linklaters warned, adding that the DA cannot be amended, but must be approved or rejected in full.

The knock-on effect

Delays to the Taxonomy Climate DA will reverberate throughout the EU’s sustainability-based regulatory agenda.

One impacted measure could be the Taxonomy Article 8 DA, which requires companies complying with the Non-Financial Reporting Directive (NFRD) – soon to be replaced by the Corporate Sustainable Reporting Directive (CSRD) – to report on their degree of alignment with the sustainable activities listed in the taxonomy.

The Taxonomy Article 8 DA’s scrutiny period ends in November, in order to apply from next year, but companies will struggle to comply without clear parameters outlining what is defined as a sustainable activity.

Clarification is sorely needed, according to recent research published by law firm Frank Bold and the Alliance for Corporate Transparency. Analysis of 250 European companies highlighted that, while there has been “timid progress” in the quality of ESG-related disclosures, companies “remain too focused on general information and lack specific meaningful data on risks, targets and key indicators”.

Further, under Articles 5 and 6 of the Taxonomy Regulation, asset managers complying with the Sustainable Finance Disclosures Regulation (SFDR) Level 2 from July 2022 must disclose how their green-labelled products align with the sustainable activities listed under the taxonomy.

Next steps

Other parts of the European Commission’s sustainable finance agenda are less likely to be impacted by any delays to the Taxonomy Climate DA.

The Commission’s Platform on Sustainable Finance (PSF) is currently consulting on the technical screening criteria for the remaining four which will fall under a separate DA: water, circular economy, pollution prevention and control and biodiversity.

The consultation has been extended, with the PSF due to deliver its recommendations to the Commission on 29 November. This DA is expected to be adopted in Q1 2022 and to be applied from 1 January 2023.

The PSF is also consulting on a brown taxonomy, which will categories companies in transition that are not yet considered wholly environmentally sustainable.

The Global Reporting Initiative (GRI) and European Financial Reporting Advisory Group (EFRAG) are also in the process of developing the EU sustainability reporting standards (ESRSs), expected to be enforced by 2024.

Requirements for companies to report in line with new ESRSs are included in the proposed CSRD.

Any other international standards for sustainability reporting that emerge – such as those being developed by the International Financial Reporting Standards (IFRS) Foundation – need to “ensure coherence” with developments coming out of the EU, said Filip Gregor, Head of Responsible Companies at Frank Bold, earlier this week at a webinar on sustainability reporting standards hosted by the GRI and World Benchmarking Alliance (WBA).

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