With Tweets, press releases and official statements aplenty, it’s hard not to have noticed that the EU’s green taxonomy got through the latest stage of negotiations yesterday, bringing Europe a step closer to having an official definition of green and some rules around disclosure.
Harder, though, is working out what it all actually means. Very few people have seen the final document, and there is confusion about the next steps, but this is what Responsible Investor understands so far.
“The taxonomy trilogue has been very high profile and controversial, with an immense level of lobbying from the private sector and civil society.”
Firstly, what happened yesterday was the conclusion of ‘trilogue’, the three-way negotiations that take place during the law-making process between representatives from the European Commission (the executive), European Parliament (legislative branch) and Council (member state body).
The taxonomy trilogue has been very high profile and controversial, with an immense level of lobbying from the private sector and civil society.
Some really fundamental disagreements between (and within) the Council and Parliament led many observers to believe that the trilogues would continue into 2020, putting the brakes on the whole process.
But after intense discussions this week, the three bodies surprised many by agreeing a “common understanding” on the legal basis of the taxonomy. As it stands it looks like a big win for the Parliament, which was fighting for a more ambitious framework, but there have been notable compromises on all sides.
Most importantly, this isn’t the end of the road: the final document will now be subject to approval at a “Coreper” – a meeting of the deputy representatives of each member state – and Plenary – the full session at the European Parliament – in coming weeks.
It’s expected that there will be further negotiations on key points, and it's possible that they will need to be thrashed out over multiple sessions, so the taxonomy could still be being negotiated into next year.
But there is also a fair likelihood that it will get the green light, given the current green agenda in Europe (the Green Deal for Europe will be unveiled on Wednesday, midway through the UN global climate negotiations at COP25 in Madrid.
Also today, the European Banking Authority made a major announcement on stress tests and supporting factors.
If the taxonomy agreement is signed off, this is what insiders say it will mean:
More investors will be required to disclose, and so will companies
This is a major development for the taxonomy. Originally, the Commission had proposed that only financial products branded ‘green’ would have to disclose how aligned they were with the new green taxonomy, to prevent greenwashing.
There was pushback on this, because it was seen to give an additional burden to green products and have no impact on the ‘non-green’ instruments.
As it stands now, Parliament has got its way, and all financial products being offered in the EU will have to disclose their alignment with the taxonomy. It’s not currently clear which products would be eligible, but under the original proposal – for ‘green’ products – the law applied to UCITS funds, Alternative Investment Funds, portfolio management and Insurance-based Investment Products.
Even more surprising, RI understands that the new agreement includes a requirement for companies currently covered by the Non-Financial-Reporting-Directive (large public-interest companies with more than 500 employees) to report against the green taxonomy.
This will be a relief to investors, who have argued that it is unfeasible for them to disclose the taxonomy-compliance of their fund holdings if the underlying companies are not obliged to report themselves. This move comes amid growing talk over recent weeks by the Commission about reviewing the NFRD next year.
The first law will come in next December, and investors and companies have one year to comply
One of the biggest pushbacks from the member state-level Council during the trilogue was over the start-date of the law. The European Commission hasn’t hung around with the taxonomy – it kicked off the technical development of the framework last year, before it even had approval from Parliament and Council, and is now chomping at the bit to get it up and running. The quicker it implements the taxonomy, the less political interference and global competition it faces; and the faster it can begin introducing other mechanisms that are based on the taxonomy (like capital relief rules, green bond standards or an ecolabel for retail funds). As a result, it wants to bring the taxonomy into law as soon as possible, while Council was fighting to stall it until 2022.
Yesterday’s agreement seems to be a compromise. RI understands that the ‘common understanding’ permits the mitigation and adaptation elements to be adopted into law next December, with a grace period of a year for application by the market.
A further four environmental dimensions will be brought in in December 2021, with another one-year grace period. That means that two years from now, eligible investors and companies must be reporting in line with the climate element of the taxonomy. The whole thing will be a legal obligation within two years.
Nuclear is in, ‘solid’ fossil fuels are out
Politically, this is the most contentious part of the taxonomy. Member states’ varying approaches to nuclear energy are well known, and it’s no surprise that there has been a tug of war over the inclusion of nuclear in the taxonomy. The only explicit exclusion outlined in the Common Understanding is ‘solid’ fossil fuels, which is generally understood to mean coal. Against the wishes of the Parliament, nuclear remains in the running for now, but will have to survive a future Do No Significant Harm filter, which is likely to identify nuclear as detrimental to other environmental dimensions of the taxonomy.
Political interference will be reined in, but disclosure will be monitored nationally
Throughout the negotiations, the Council has been keen to ensure it has a firm grip on the development of the taxonomy.
On this basis, it has insisted the taxonomy is developed using ‘implementing acts’, which essentially give it more control. This seems to have been defeated in the negotiations, with preference being given to Delegated Acts, instead. But the Council appears to have landed a win in another way: the Parliament wanted the European Supervisory Authorities (the European banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) to be given the power to supervise taxonomy-related disclosures.
This was to ensure it was monitored at a pan-EU level, rather than giving such powers to national-level regulators that might have varying levels of commitment to the cause.
The Council favoured the national approach, and RI understands that this is the one that has been put forward in the Common Understanding document.
RI also understands that the Council will establish a Sustainable Finance Expert Group of its own, which will monitor and approve parts of the technical process going forward.