Just a few weeks after the UN climate conference COP26 in Glasgow, one of the European Commission’s most important initiatives in recent years is under fire: the “EU Taxonomy”. The reason is a number of EU Member States that want to admit natural gas - and even nuclear energy - to the list of green energy sources. Europe suddenly risks becoming “the laggard of the world”, critics have warned.
In the week that the Dutch House of Representatives passed a motion that gas and nuclear energy should not receive a sustainable stamp in the European taxonomy, the (former) members of the technical working group on sustainable finance wrote an open letter published by the Politico news platform.
In it, the 13 experts warned that the Paris Climate Agreement’s targets of no more than a 1.5-degree rise in global temperature will become unachievable if the European Commission does not stand firm against the attack by ten EU member states, including Greece, Hungary and Poland, which believe that natural gas, as a “transition fuel”, should be allowed to be part of the green taxonomy (see annex).
Trust in taxonomy is at stake
The members of the expert panel referred to above warned that confidence in the taxonomy, which was followed by countries worldwide when it was announced, is at stake. The central issue in the discussion is whether gas can be included in the taxonomy. The aforementioned member states agree, while both IPCC and the International Energy Agency (IEA) previously stated that no new investments in fossil fuels should be made in order to achieve the objective of a maximum global warming of 1.5 degrees.
The experts also refer to new data from satellites showing that methane is leaking from gas installations on a much larger scale than was previously assumed and that, moreover, methane contributes significantly to CO2 emissions worldwide. At the time, the expert group set an upper limit of 100 grams CO2e/kWH in order to be considered “sustainable”. Banks have established their green ratio asset ratios and asset managers their green investment ratios on the basis of this criterion.
This objective has been included in the Taxonomy Act, which has been adopted by the European Parliament and meanwhile integrated in recovery plans, and has also served as a basis for issuing green (government) bonds, the experts wrote in their open letter. They also pointed out that even the parliament of Russia - the world’s largest gas supplier - adheres to this limit, while China has now also excluded gas-generated electricity from its own taxonomy.
The so-called Net Zero Asset Owner Alliance of pension funds, insurers and other institutional investors, which together account for 9,000 billion euros in assets, has also previously taken the position that they reject the label for gas.
Weaker than China and Russia
“If the EU were to backtrack on its taxonomy”, the authors of the open letter wrote, “this would damage its scientific credibility and bring the EU from its position of climate leadership to one weaker than China and Russia”. Not a signatory of this open letter, but supporting it, according to a post on Linkedin, is former PGGM Fund News columnist Brenda Kramer. She has also previously been a member of the expert panel.
Against the background of this battle for national interests, Austria has announced that it will go to the European Court if nuclear energy is included in the green taxonomy. It will probably be supported by Denmark, Germany, Luxembourg and Portugal, with countries led by France and Finland arguing that nuclear power is good for the climate because it is CO2-free.
Meanwhile, the regulators in Europe, united in ESA, are watching the wrangling in the European Union with concern. Last Monday, the European Commission again postponed the introduction of the European Sustainable Finance Disclosure Regulation (SFDR). In concrete terms, this means that the so-called “regulatory technical standards” (RTS) will be postponed from 1 January 2022 to 1 July 2022. When the RTS are published, the market sector will have another six months to comply with European legislation by 1 January 2023.
Postponement of a technical nature
The reason for this postponement is of a technical nature: the European regulators approved the final proposal for SDR Level 2 in October. Then the European Commission has 3 months to approve it. Even if they were to approve it unchanged, the European Parliament and the Council have limited time to approve it. In practice, the EU needs until at least April/May, which is too short for market participants to be able to put the regulation into effect on 1 July.
Experts have pointed out that the discussion on taxonomy is largely unrelated to this, although the level 2 obligations of the SFDR do specify how you should report on how many of the investments are taxonomy-aligned. In the coming years, new ecological objectives and a social taxonomy will be added to the discussion on gas and nuclear energy.
The European Commission is busy laying the foundations for a vast structure of laws and regulations aimed at increasing (the possibilities for) sustainable financing.
European Single Action Point
To this end, the Commission is seeking to establish a single EU access point for financial and non-financial company data (ESAP). “This is a crucial element of the Capital Markets Union and the EU action plan for sustainable finance. By organising data more efficiently and providing robust, comparable data, banks will be able to better serve their customers and direct more funds towards the green transition,” the Dutch Banking Association (NVB) wrote in an earlier consultation.
The NVB advocated “a phased approach by starting small. We recommend prioritising data dissemination through a pilot scheme for listed EU issuers with large equity capitalisation. In a second and third phase, specific securities could be included (fixed income securities, UCITs, AIFs and structured products, etc) and disclosure by small and medium-sized enterprises, as well as unlisted companies.“