EU policymakers unveiled the much-anticipated details of their green taxonomy on Friday, sparking claims that they have been influenced too much by lobbying and not enough by science.
The taxonomy is expected to set a global standard for what can credibly be called ‘green’, and will serve as the basis for a number of new rules to stimulate sustainable finance in the EU. Its legal remit, known as ‘Level 1’, was agreed last December by European Parliament, Council and Commission; but now the Commission wants feedback on its ‘Level 2’ proposals, which set out the details – notably which business activities will make the cut.
The proposals are based on advice from the Technical Expert Group on Sustainable Finance (TEG), an EU-appointed group of business, investment and environmental specialists who have been developing the thinking around the taxonomy for more than two years. It made its final recommendations in March.
Many expected the Commission’s proposals to track those recommendations very closely, but they veer off in some important ways, according to observers.
“On initial reflection, substantial diversions seem to have been taken on criteria for bioenergy, forestry and buildings, while the TEG’s recommendations have been adhered to in other sectors, including energy,” noted the Club of Rome, a network of high-profile figures promoting sustainability.
Sandrine Dixson-Decleve, Club of Rome’s co-president and a TEG member, praised the Commission for adopting strict emissions thresholds for electricity generation, which essentially rule out gas as a green business activity unless it has carbon capture and storage built in.
However, she described the proposals as taking “a ‘pick and choose’ approach, from sector to sector, when it comes to utilising the science-based recommendations of the TEG”, adding that they “move the taxonomy away from ensuring substantial contribution [to environmental objectives] in all sectors”.
Concerns have been raised about the emissions thresholds for manufacturing, construction, agriculture, forestry and bioenergy. Thresholds have been loosened for cement, but tightened for public transport and hydrogen under the latest plans.
Notably, the criteria for buildings to be classed as energy efficient has been tightened, which could rule out many existing green bonds issued for such projects. Energy efficiency is the largest category for green bond issuance in Europe, so this uncertainty about credibility could have an effect on the asset class’ growth over the next year or so.
WWF slammed the Commission’s inclusion of wood-based bioenergy in the proposals, saying it undermined “the taxonomy’s credibility” because burning trees has been shown to produce more greenhouse gas emissions than coal. However, the move has been justified because it aligns the new criteria with the existing REDD rules for sustainable forestry from the UN.
Fellow environmental non-profit E3G insisted that the suggested thresholds in some sectors “deviate from scientific evidence as a result of political and industry pressure”.
The taxonomy is becoming increasingly central to the future of European policy. Originally created as a disclosure framework, it now looks set to underpin an EU green bond standard, potential changes to capital requirements and fund labels for retail investors. Some financial market participants and companies have been lobbying aggressively to water it down, realising it could influence the future cost of capital.
For example, Danske Bank released research last week claiming the taxonomy “represents the most immediate ESG risk to ship owners’ credit profiles” and concluding that it represents a “near- and long-term risk to ship owners’ credit profiles, due to the regulation’s potential to curtail issuers’ access to funding in capital markets”.
This summer, concerns about the taxonomy’s influence on access to capital began to spread to public finance, too, as the framework crept into EU budget plans for the first time.
Although there is currently no explicit requirement for governments to align their public spending with the taxonomy, if Member States wish to tap the Commission’s Covid-recovery funds, they must demonstrate that at least 37% of their investment plans support decarbonisation, and none of the cash can be used to finance projects that significantly harm the six environmental objectives laid out in the taxonomy.
The Commission will partly finance those recovery funds – and other pillars of its budget, including the Just Transition Mechanism – with green bonds. Assuming it follows its own rules and issues notes in line with the upcoming EU Green Bond Standard, the proceeds from those deals will have to be spent in accordance with the taxonomy. Ultimately, this will mean that Member States must adhere to the taxonomy if they want to access certain funds. This could explain heightened concerns over political lobbying in relation to the latest proposals.
“The answers may not always be comfortable – for companies, investors and even Member States,” said Nathan Fabian, former TEG Chair and Head of Responsible Investment at the PRI, “but the urgency of the transition cannot be denied. We need robust, science-based thresholds to ensure that markets function properly and to build confidence in the taxonomy as a credible transition tool.”
Despite the criticism from civil society, Fabian said the Commission had adopted “many aspects” of the TEG’s advice and said divergence appeared to driven by “a combination of adjustments to improve measurability, resolve presentational issues in criteria, align criteria more closely with EU legislation and the addition of criteria for some economic activities.”
The proposed delegated acts are open for consultation until mid-December. The Commission says it will adopt a final version by the end of the year, after which point EU Parliament and Council will have two months to approve or veto the rules.