Latest position on EU taxonomy regulation re sustainable finance

Europe

On 24 September 2019, the EU Council published this 'I' Item Note giving its majority approval to proceed with the next stage in the legislative journey of the “Taxonomy Regulation”, being inviting negotiations with the European Parliament. An aim of the proposed Taxonomy Regulation is to establish a coherent, EU-wide classification system, or “taxonomy”, for environmentally sustainable economic activities.

Background

The proposed Taxonomy Regulation is one element of a package of legislative proposals submitted to the Council as part of the Commission’s Action Plan on Financing Sustainable Growth. The objective of the Action Plan is to encourage, facilitate and materially increase private investment in environmentally sustainable activities across the EU. Indeed, it is an aim that private capital flows will be redirected to sustainable activities. A hurdle was perceived to be a lack of a common understanding of what is a “sustainable” activity in environment terms. The EU considers that this needs to be clarified, and by doing so the finance community will gain confidence in sustainable products and, also tackle the scourge of greenwashing.

The proposed taxonomy Regulation

As a reminder, the proposed Regulation aims to define an environment sustainable activity by reference to six environment objectives. These objectives cover (1) climate change mitigation, (2) climate change adaptation, (3) sustainable use and protection of water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, and (6) restoration of biodiversity and ecosystems.

In order to qualify as “sustainable” under the proposed Regulation, the relevant activity must:

  1. contribute substantively to at least one of the EU’s environment objectives;
  2. not significantly harm any of the EU’s environmental objectives;
  3. be carried out in compliance with minimum social and governance safeguards; and
  4. comply with specific technical screening criteria defined by the Commission.

What about nuclear?

The Council’s ‘I’ Item Note includes statements made by Germany, Luxembourg, Austria and Greece expressing concern that it would be an inherent flaw should the taxonomy allow “nuclear energy” to qualify as sustainable, leaving the taxonomy open to severe criticism. This issue may prove to be relevant in the upcoming negotiations with the European Parliament. We suspect that the nuclear energy here referred to is traditional nuclear energy. It is not clear from the “I” Item Note if the objection extended also to potential energy from nuclear fusion (about which a huge internationally funded plant is currently being built at Cadarache, France).

Comment

Maybe the objection raised by Germany, Luxembourg, Austria and Greece could be interpreted as symptomatic of inherent difficulties in defining what is environmentally sustainable. Conversely a better view may be that if the objective of the Taxonomy is to provide the finance community with confidence, drawing out these objections, settling them and setting out the final position in a Regulation is exactly what is needed.

Our minds turn to whether the Regulation will prove to be an interim step towards the EU’s objective of diverting private capital to fund sustainable activities at scale. It must be at least conceivable that if private capital continues to represent the most important source of funding green sustainable activities and the only means by which the EU can reach its Paris Agreement commitments, continued investment at the least sustainable end of the spectrum may in future be subject to a more onerous regulatory regime.

Article co-authored by Jessica Buttanshaw.