Member states campaigning for ‘complementary’ act, but NGOs warn of risks to credibility.
Although the first Climate Delegated Act (DA) for the EU’s environmental taxonomy was given final approval this week by the EU Council, there is ongoing uncertainty regarding the inclusion of nuclear and gas-fired energy generation.
The first DA outlines the technical screening criteria for activities that contribute to climate change adaptation and mitigation objectives, and will come into force on 1 January, 2022.
Green taxonomies aim to categorise industries and activities as environmentally sustainable according to scientific criteria. These activities are therefore suitable for investment via ESG-labelled fund solutions.
However, following a surge in “political campaigning”, details for a ‘complementary DA’ are expected on 22 December, which will outline how gas and nuclear energy can be included in the green taxonomy, Paul Schreiber, Regulation Campaigner at NGO Reclaim Finance told ESG Investor.
“France and fellow EU states in the gas-and-nuclear alliance are sending a message to the Commission: meet our demands or we sink the taxonomy. Unfortunately, it seems that EU authorities are going to accede to these unsustainable demands. If they do, it will be at the cost of the taxonomy’s credibility, as more and more financial institutions voice their concern over the inclusion of gas and nuclear, which would contradict the demands of climate science and the EU’s own experts,” said Schreiber.
Previously, there were concerns that the prospective complementary DA was holding the overall taxonomy “hostage”, as some Member States wanted to delay the passing of the Climate DA until the additional DA had been considered.
The taxonomy should be based on scientific evidence, not political bargaining, said Schreiber. “Gas inclusion would notably mean that any investor using [the taxonomy] would contribute to EU gas dependency and lock-in carbon emissions for decades, effectively betraying their net zero pledge or target,” he added.
In response to the possibility of a complementary DA, the Principles for Responsible Investment (PRI) has published a position paper. It outlines alternative legislative solutions that could allow nuclear energy and gas to be recognised as pivotal to the transition to a low-carbon world, without labelling them as “inherently sustainable activities”.
“PRI will be attentive to a possible second DA that could cover nuclear energy and gas-fired power,” said Fiona Reynolds, PRI CEO. “Any proposal from the Commission should consider investors’ need for objective criteria. Recognising activities that have a role in the transition, for example via an extension to the EU Sustainable Taxonomy, should be prioritised by EU policymakers.”
“A tool for greenwashing”
The inclusion of gas and nuclear energy in the environmental taxonomy will subsequently undermine the purpose of a proposed brown taxonomy, said Schreiber.
The brown taxonomy is being developed by the Platform on Sustainable Finance (PSF) and aims to categorise the more carbon-intensive activities from industries in transition that are not yet wholly sustainable.
The PSF is also developing a social taxonomy and the technical screening criteria for the environmental taxonomy’s other DA for the remaining four objectives: water, circular economy; pollution; and biodiversity.
“Following the progress made at COP26, this is definitely two steps back. We may end up with a taxonomy that is not at all useful for the transition to net zero greenhouse gas (GHG) emissions and is instead a tool for greenwashing,” Schreiber warned. “This will become problematic for investors with Taxonomy-aligned products, particularly if their beneficiaries and/or clients don’t want to be contributing to the further development of gas and nuclear power,” he added.
Implications for investors
Approval of the first DA means investors and companies can now start reporting against the taxonomy on climate-related factors from next year.
Asset managers will also be able to prepare for upcoming disclosure requirements under the Sustainable Finance Disclosure Regulation (SFDR) as they relate to environmental activities. SFDR Level 2, which requires disclosures referencing the taxonomy, was recently delayed by a further six months until 2023.
One “cornerstone” of the Climate DA is the 100g CO2e/kWh declining threshold for electricity generation, according to investor-focused NGO Climate Bonds Initiative. This should provide “clear guidance” to Europe’s electricity sector on how to align their activities with net zero, the non-profit noted. It has also been replicated in other national taxonomies, such as Russia’s.
Experts during a Regulation Asia webinar last month highlighted the importance of aligning global taxonomies to ensure all countries are equally dedicated to decarbonising in line with 1.5°C of warming by 2050.
However, the EU faces an implementation gap of six years in cutting emissions from the energy sector by 2030, according to a report by Allianz. To meet its 55% reduction target by 2030, the EU needs €717 billion of additional investment a year, including €118 billion towards new sustainable power plants and grids.
A previous report by Allianz further emphasised the importance of decarbonising European utilities through electrification. If established sustainable technologies are expanded, such as wind and solar, then the electrification rate could reach 76% by 2050, Allianz said.