The European Commission was meant to have adopted a delegated act containing the technical screening criteria (TSC) for the first two environmental objectives (climate change adaptation and mitigation) under the Taxonomy Regulation by 31 December 2020.
However, the Commission has received over 46,000 replies to its consultation on the delegated act and, while many of these reflect an organised campaign, it is clear that stakeholders have a number of serious concerns over the TSC as currently drafted. Some believe the Commission has deviated too far from what the Technical Expert Group (TEG) recommended. Others believe that the TSC is too complex and prescriptive and could in fact create a barrier to investment in the net zero transition.
There is a growing realisation that many businesses, and certain Member States, will not be able to go from “brown” to “green” overnight and that a number of “olive” activities may have an important role to play in the net zero transition. Or as Mark Carney has put it, we are going to need “50 shades of green”.
A key sticking point for the TSC has been the potential role of natural gas as a transition energy source, and the potential inclusion of nuclear power in the taxonomy. In fact, a number of eastern and southern EU Member States threatened to veto the TSC unless changes were made to how natural gas and other transition activities are dealt with in the TSC (see here).
As a result, the European Commission has asked the Platform on Sustainable Finance (PSF), which replaced the TEG, to advise it on how the taxonomy could be used to finance transition activities (see Commission letter). In the Commission’s own words: “There is a need to give reassurance that the taxonomy will not block access to finance for enterprises and sectors in transition towards our climate targets.”
The PSF has been given until mid-March to provide "advice on the existing and potential use of the EU taxonomy framework for enabling the financing of the transition towards a sustainable economy".
In particular, the Commission has asked the PSF for advice on the following:
- Can the current EU taxonomy framework be used to provide greater support for attracting capital for the transition of companies towards “sustainable” activities, including in ways not yet proposed by the Commission and if so in which ways?
- Can the EU taxonomy framework support finance for companies undertaking activities that do not yet meet, or may be unable to meet, the substantial contribution criteria? And how can this be done?
- Can the current EU Taxonomy framework support finance for companies active in sectors that are not covered in the Taxonomy Regulation’s delegated act?
- How does the use of key terminology such as “sustainable”, “green” and “harmful” compare across the taxonomy framework and other relevant sustainable finance frameworks and how can it be clarified and harmonised?
- What further avenues could be explored to enable financing the transition through development of the taxonomy framework and beyond?
- Can we clearly address the concerns that the taxonomy will be used to prevent financing of transitional activities, while at the same time ensuring that we are not facilitating “greenwashing”?
According to recent remarks by the Commission, it intends to delay the delegated act so that responses can be considered and the Commission will consider “recalibrating” the TSC where serious concerns are raised, but does not want to break the link with science or the alignment with European Green Deal targets.
There has been some speculation that the Commission may be considering adopting - together - the regulatory technical standards (RTS) under the Disclosure Regulation (SFDR), the related delegated acts under MiFID II, AIFMD and UCITS and possibly also the delegated act with the TSC under the Taxonomy Regulation around 21 April, along with a Communication on a climate change adaptation and mitigation taxonomy. However, this is as yet unconfirmed. Our understanding is that the Communication would explain how the various level 2 rules in the sustainable finance package fit together, which is something industry has asked for.
The question of how nuclear energy should be treated under the EU taxonomy is being looked at separately by the Commission’s in-house research body, the Joint Research Centre (JRC). The JRC is expected to submit a technical report on the “do no significant harm” aspects of nuclear energy in March 2021 (see here). That report will then need to be reviewed by experts before the Commission can decide if - and how - to amend the TSC to deal with nuclear energy. So it is unlikely we will see something on this until the second half of 2021. However, the nuclear aspect is not expected to delay adoption of the rest of the TSC. The TSC can always be amended later in 2021 to reflect whatever is agreed on nuclear.