Industry

EU Taxonomy’s Climate Credentials Under Threat from ‘Eco-schemes’

Concerns linger over potential for unsustainable agricultural practices to be included.

European Commission (EC) plans to include gas and nuclear energy in its green taxonomy have been widely condemned, but investors must also be aware of the risk of unsustainable agricultural practices being added to the framework.

At a webinar co-hosted by the FAIRR Initiative and the Institutional Investors Group on Climate Change (IIGCC) last week, speakers said ‘eco-schemes’ being submitted as part of countries’ national plans under the revised Common Agricultural Policy (CAP) could be automatically included in the taxonomy.

“These highly damaging sectors, like agriculture, could bankrupt the climate,” said Ariel Brunner, Head of EU Policy at environmental NGO Birdlife International, at the webinar.

Speakers also expressed concern that member states were applying different approaches to the activities being included in such schemes, which could lead to wide differences in their sustainability credentials.

If the eco-schemes are automatically included in the taxonomy, via a complementary delegated act similar to the one unveiled on 31 December, investors could potentially find themselves allocating capital to projects with damaging impacts on the climate, even though they might have other sustainability benefits, such as better treatment of animals or support for biodiversity.

Speakers also warned of extra burdens for investors because of the extra due diligence required according to the different rules on eco-schemes being followed across the 27 EU members.

“We are still waiting to hear whether EU agricultural subsidies are to be included in the EU Taxonomy,” said Dr Helena Wright, Policy Director at the FAIRR Initiative, to ESG Investor at the beginning of January.

Last October, investors worth US$3.5 trillion warned the European Commission to ensure harmful or emissions-intensive practices “are not inadvertently categorised as sustainable” through their inclusion in the taxonomy. They also expressed their concern that industrial livestock production may be classified as green “without sufficient consideration of multiple ESG risks”.

With the recent complementary delegated act only dealing with gas and nuclear energy, NGOs expect agricultural activities to be included in the taxonomy via a further similar act, but timelines are currently unclear.

The EC is currently in the process of collecting member state feedback on the proposed changes in its seven-year review of the CAP policy, which is a mainstay of the bloc’s agriculture framework. Investors have expressed frustration at proposed updates to the policy that include eco-schemes – payment programmes designed to protect the environment – that could see member states self-identify which of their schemes qualify as ‘green’ with less oversight.

Eco-schemes may pose environmental risks

Speaking in a personal capacity, Brunner said the eco-schemes would achieve almost nothing in terms of reducing emissions from intensive livestock farming. “Giving eco-schemes to farmers who are being slightly less horrible to animals is good, but it is not going to help the climate,” he explained.

“Some countries, like Italy, are designing the schemes as ‘per animal’, which means more animals equals more cash. This could drive some of the most climate-problematic production upwards.”

The eco-schemes could encourage more intensive farming and the use of antibiotics in animals increase, according to FAIRR. They would also be administrated by individual member states, meaning there could be 27 different criteria for counting as ‘green’ under the schemes.

When investing in projects in a specific member state, an asset manager would have to check that the country’s policy on eco-schemes did not contravene any green criteria for its investments. To avoid breaching sustainable investing guidelines, the manager would have to gain assurance the project had not received any eco-scheme payments.

Initially designed to support farmers and improve agricultural productivity, the current CAP revisions are partially intended to help tackle climate change and ensure the sustainable management of natural resources.

Reforms to CAP proposed by the EC in 2018, were provisionally completed in June 2021 and adopted by the Council of EU agri-food ministers. They were given provisional approval by the European Parliament’s AGRI Committee in September.

One of the main issues for CAP reform is its alignment with the European Green Deal. CAP reforms were set out in 2018, before the Green Deal was laid out in December 2019. Proponents of a more environmentally friendly CAP encouraged attempts to retrofit some of these Green Deal policies within it.

The revised update to CAP was first sent to the European Parliament in May last year. In October it was stalled due to opposition to the eco-schemes but passed in November through the European Parliament. However, it still needs to have strategic plans for member states filed, which will provide the plan for how each country will implement CAP. Currently, several member states are behind in giving these plans, which were due this month.

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