Taxonomy Delays Thwart EU Green Deal Momentum

Europe must complete taxonomy framework “without further delay” to uphold global leadership role.

Europe’s ambition to the first carbon-neutral continent and maintain leadership in sustainable finance took a blow this week with delays confirmed to efforts to build on its environmental taxonomy.

Until the EU’s social and brown taxonomies are finalised and passed into law, the environmental taxonomy “is not enough to deliver on the EU’s sustainability objectives, especially if gas and nuclear will be considered green”, said Maria van der Heide, Head of EU Policy at responsible investment NGO ShareAction.

On Monday, the Platform on Sustainable Finance (PSF), a permanent expert group of the European Commission, announced that its finalised recommendations for the social and brown taxonomies will be delayed until Q1 2022.

The technical screening criteria for the remaining four objectives of the environmental taxonomy have also been delayed until next year. Once finalised, the criteria for water, circular economy, pollution and biodiversity will be published under a separate delegated act (DA) from the existing DA for climate adaptation and mitigation, which was approved by the EU Council last week.

These taxonomies aim to categorise industries and activities that are considered sustainable and therefore suitable for investment via ESG-labelled fund solutions. The social taxonomy will categorise all socially sustainable activities, whereas the brown taxonomy will categorise companies and activities in transition that are not yet considered wholly environmentally sustainable.

This framework underpins the foundations for Europe’s Green Deal, by directing investment to activities that support its objectives of carbon neutrality, just transition and resource efficiency.

“It is disappointing to see that the social taxonomy and taxonomy extension reports are delayed, but […] I think both the PSF and the Commission understand the urgency very well,” said van der Heide. “If the EU wants to uphold its role as global leader in setting standards for sustainable finance, it needs to keep up the ambition and complete the taxonomy framework without further delay.”

The additional will help investors support a “fair, inclusive transition” to net zero greenhouse gas (GHG) emissions, van der Heide noted. Further, asset managers having to comply with the Sustainable Finance Disclosure Regulation (SFDR) would “benefit greatly” from the data that would become available through an expanded taxonomy framework, she said.

Nathan Fabian, PSF Chairman and Chief Responsible Investment Officer at the Principles for Responsible Investment, told ESG Investor that the social taxonomy has “progressed substantially” since consultation. The PSF is currently considering “potential linkages with the future European sustainability reporting standards (ESRSs)”, he said.

“The social taxonomy report is the start of a longer conversation about a regulatory approach on social investing,” Fabian added. “Investors will learn a lot from the PSF report, but regulatory requirements are still some way off.”

The PSF will provide the Commission with an “overarching structure of a potential social taxonomy”, as opposed to technical screening criteria at an economic activity level that investors can use to build financial products, added Signe Andreasen Lysgaard, Strategic Advisor on Business and Human Rights for the Danish Institute for Human Rights. Lysgaard was also part of the PSF subgroup developing the social taxonomy.

The PSF’s brown taxonomy outline aims to provide a “much richer framework to support transition”, said Fabian. “These are PSF recommendations that can help inform investor thinking, but are not expected to immediately be regulatory requirements,” he noted.

Europe’s sustainable finance agenda under pressure  

Although the social and brown taxonomy proposals are only delayed until early 2022, the EU is already under pressure to deliver on its sustainable finance promises.

Earlier this month, the Commission announced that the second part of SFDR will be delayed until January 2023, with first reports expected from asset managers and other in scope firms by July.

Further, a legislative proposal requiring firms to conduct due diligence on human rights and environmental impacts across their supply chains, originally expected in the summer, is now not expected until the end of the year. However, there is some doubt as to whether the legislation will go ahead at all.

In September, the European Court of Auditors (ECA) warned that the EU isn’t doing enough to promote sustainable investments. While the ECA acknowledged that the Commission’s “rightly focused” on increasing transparency in the market, it criticised the “lack of accompanying measures to address the environmental and social cost of unsustainable economic activities”.

The ECA has called on the Commission to apply consistent criteria to determine the sustainability of EU budget investments and to better target efforts to generate sustainable investment opportunities.

“Defining what is socially sustainable and which activities should be considered as harmful are the missing pieces that can make the taxonomy puzzle complete,” ShareAction’s van der Heide said.

More recently, the Commission has come under fire from NGOs and investors following its plans to consider a ‘complementary’ DA within the environmental taxonomy, which will outline how gas and nuclear energy can be included as sustainable activities. Further details are expected on 22 December.

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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