What’s going on with the EU’s Green Taxonomy?

The EU’s flagship sustainability project is still very much up in the air

There is no shortage of opinion on the EU’s plans for a green taxonomy – most recently illustrated by the chaos at the European Parliament last week during a major vote on the topic. Of all the proposals being laid out by the European Commission, its move to create a catalogue of green investment categories and activities is the one that prompts the greatest variety of viewpoints. Some say climate finance simply can’t reach scale without these kind of universal standards; others say it will make the market niche and destroy innovation; some claim it is key to preventing greenwash as the market goes mainstream; others say the EU’s human resources would be much more useful deployed elsewhere.

Of the three legislative proposals put forward by the Commission last May, the taxonomy is the only one that hasn’t reached trilogue

In the latest sign of how many eyes are on the taxonomy’s development, the Commission announced yesterday that nearly 1,200 sets of comments were received from almost 250 individuals or institutions as part of a public consultation on the topic that closed last month. The responses relate to an interim report from the Technical Expert Group (TEG) on sustainable finance, which outlined the 24 climate mitigation activities it plans to focus on first (spanning agriculture, forestry & fishing; manufacturing; electricity, gas, steam & air conditioning supply; transportation & storage; and construction & real estate activities), and potential principles, metrics and thresholds for each. There was a second pillar to the consultation, on how user-friendly the current proposed taxonomy is for market participants, which received 205 responses.
Over the longer term, the taxonomy will cover other mitigation areas, and be extended further, to cover adaptation, the blue economy, the circular economy, pollution and healthy ecosystems.
One of the big losses chalked up by civil society and progressive politicians at last week’s Parliamentary vote was the rejection of plans to commit the taxonomy concretely to covering social factors, and integrating human rights throughout. There is a tendency in the rhetoric around the Action Plan to interchange ‘climate finance’ with ‘sustainable finance’ as if they’re the same thing, leaving those who see sustainability as a broader environmental and social approach frustrated by the current agenda’s fixation with climate change.
TEG’s interim report was the result of months of work by its taxonomy sub-committee, which is led by Nathan Fabian, Chief Responsible Investment Officer at the Principles for Responsible Investment.
The TEG is currently wading through all the responses to both pillars of the public consultation, to feed into its final report.At the same time, it appointed some 160 more experts last month to advise it on future mitigation and adaptation areas. Olivier Guersent, the European Commission’s Director General for Financial Stability, Financial Services and Capital Markets Union, remarked in a speech recently that “currently the number of experts that are working for free on this is higher than the number of civil servants I have in my DG working on financial regulation. That shows the level of commitment.”
Fabian explains that the new advisors have been asked a set of questions to form the basis of the next stage of the taxonomy. “They’re answering those questions this month, and then we’ll sift through and get a sense of potential recommendations for those categories.” On the back of that, the sub-group will devise a second set of questions for the experts, and later in the month hold workshops in Brussels to have “in-depth discussions” based on all the answers received, and “discuss all the nuances around the different areas, and the trade-offs that will be faced”.
“Our hope is that any issues that arise, or further evidence that needs to be gathered, can be dealt with in April, so that by May, we’ll have a set of relatively coherent recommendations for the additional technical experts, and will then be able to decide the priorities, criteria and thresholds before submitting our recommendations to the Commission in June,” he explains.
The TEG’s work is all part of the ‘Level 2’ process of EU law-making, through which the European Commission – on the back of a mandate agreed with European Parliament and Council (through the Level 1 part of the process) – works out the details of how to implement a piece of legislation. What’s slightly alarming, perhaps, is that, despite the breakneck speed with which the Commission and the TEG are moving on the taxonomy, the Level 1 process hasn’t actually been concluded yet, meaning their mandate could potentially change dramatically.
Of the whole EU Action Plan on sustainable finance, the green taxonomy was supposed to be the first piece of legislation out of the blocks. It is slated to be the basis for a number of other objectives, such as the green bond standards, fund labels and possible changes to capital requirements, so there is some urgency to getting it up and running. But, of the three legislative proposals put forward by the Commission last May, it’s the only one that hasn’t reached trilogue (the Commission makes a legislative proposal, which is then reviewed independently by the Council and Parliament, and then all three enter negotiations – trilogue – to agree the final legislative mandate). Given that there are only a few weeks left of the current EU legislature, it’s looking tight to get an agreement through this time around.

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The official line of the Commission is that they are hopeful that the European Parliament and the Council will finalise their positions on the taxonomy before summer, so trilogues can commence in the autumn. But, in his speech earlier this month, Guersent told the audience: “I’m not too optimistic that in the month or so that remains in this legislature, we will manage this… But at the end of the day, this is not what really matters; what really matters is that we agree on these standards and then we put them out there for the market to use.” Incorporating the taxonomy into EU law is important, he acknowledged, but “in my view, a secondary priority”.

Even the proposal’s own parliamentary rapporteurs abstained from voting on the final report after a rollercoaster series of smaller votes left it – as one observer said – “as if their proposals had never existed”.

It’s just as well, because, despite the Economics Committee (ECON) and the Environmental Committee (ENVI) completing the main Parliamentary vote on the proposal, there was a palpable sense of uncertainty and confusion in the room. Even the proposal’s own parliamentary rapporteurs abstained from voting on the final report after a rollercoaster series of smaller votes left it – as one observer said – “as if their proposals had never existed”. The defeated groups look set to take one final shot at pushing their more ambitious agenda (which also includes integrating human rights and requiring all market participants to disclose against the taxonomy, not just ‘niche’ providers) by tabling final amendments ahead of Plenary (the final vote by the whole of Parliament), currently scheduled for next week. So, there is still no real clarity on what Parliament will take forward into negotiations with Council – let alone what will come out the other end.
From the Council perspective, a spokeswoman said it is currently discussing the taxonomy at technical level, and – now that it’s finished with the files on low-carbon benchmarks and disclosures – will plan “to intensify its efforts towards reaching a Council negotiating position on the taxonomy by the end of June”.One thing is clear in all this, though: business and industry may have been relatively ‘hands off’ with the other two legislative proposals, but they have no such plans for the taxonomy. The Progressive Alliance of Socialists and Democrats blamed last week’s vote on “a lot of lobbying from the industry that has been listened to by the conservatives”. Rachel Owens, Head of EU Advocacy for NGO Global Witness, said that “profit and business, as usual, trumped society”, while another observer pointed the finger at lobbying efforts from the likes of Business Europe and EuropeanIssuers, which he said “opposed any ambitious proposals”.
Business Europe did not respond to RI’s request for comment on its taxonomy stance, but EuropeanIssuers, which represents listed firms, put out a statement earlier this month saying that, while it supported the original legislative proposal, the Parliament’s amendments to make it more ambitious “have been a cause of major concerns for companies” and were “very worrying”.
“Several of the amendments aim at excluding specific sectors from access to sustainable and corporate finance,” the body continued, referring to plans to widen the taxonomy’s scope so it also identifies business activities “with a significant negative environmental impact”. This is informally referred to as a ‘brown taxonomy’, and was an idea rejected by the Commission in its original legislative proposal, with EU Vice President Valdis Dombrovskis saying at the time that this kind of approach punished firms, rather than encouraging them.
“We strongly oppose such a “brown-listing” approach and support the original scope of the proposal targeting only financial products that are marketed as environmentally sustainable,” said EuropeanIssuers. “It is important to ensure that the Taxonomy Regulation should not exclude entire sectors and activities from access to sustainable finance.”
So, the green taxonomy might seem like the most fully-formed and fast-moving initiative to be coming out of the Brussels sustainability agenda but, between the Parliamentary feuding, the corporate lobbying, the diverse market feedback and the lack of time to get anything through this legislature, there is still everything to play for.