Major disagreements have broken out in the European Union about how individual countries will achieve net zero carbon, a fight that threatens to block the European Commission’s proposed road map.
The European Commission has postponed implementation of rules governing which projects are eligible for sustainable finance because of objections from eastern and southern member states.
These rules contain emissions thresholds defining what economic activity is considered “sustainable”.
Gas feels left out
Bulgaria, Croatia, Cyprus, the Czech Republic, Greece, Hungary, Malta, Poland, Romania, and Slovakia have all signed a paper calling for natural gas to be included as a transitional fuel.
Poland and other Eastern European countries are also asserting their right to choose their own energy mix, which includes gas, when meeting the bloc’s climate goals.
Just before Christmas, EU leaders were forced to acknowledge the right of each country “to decide on their energy mix and to choose the most appropriate technologies to achieve collectively the 2030 climate target, including transitional technologies such as gas”.
Those countries that rely heavily on coal claim that using the most efficient new gas turbine power stations would be the most cost-efficient way for them to reduce emissions.
But others say this would lock in emissions from those generators for 20 to 25 years.
Gas not the only problem
Germany’s finance ministry claimed that if the act was implemented as currently drafted only two per cent of German blue-chip companies listed on the DAX stock exchange would be considered sustainable.
Luxembourg has also found fault.
“There are many industries that are neither clean nor dirty and they also raise funding on the market,” commented Yves Mersh, Luxembourg’s representative at the European Central Bank’s executive board. He pointed out “a certain gap between [new rules’] envisaged objective and its practical usability”.
The European Commission’s spokesperson for banking, financial services, taxation and customs, Daniel Sheridan Ferrie, told media it wants “to adopt the delegated act as soon as possible”. But the proposal would then go to the European Parliament, which could also scupper it because of the widespread opposition.
Agriculture and industry
Meanwhile, there is criticism in other parts that the proposal does not go far enough.
Some say, for example, that agriculture, which is responsible for 10 per cent of the EU’s greenhouse gas emissions (GHG), is getting an easy ride.
The Institute for European Environmental Policy said that much more detail is required from forestry, livestock and arable farming sectors about the relative emissions of proposed projects, and about the level of carbon held in soil and plants. Effects on biodiversity also need to be taken into account.
Meanwhile, industry is complaining the emissions limit for energy production of 100g CO2e/kWh means sectors such as chemical, food and drink, pulp and paper, and alumina would have few options to secure their energy needs. Co-generation, for example, is a principal energy source that would not pass the threshold.
Often, it does not even meet another emissions limit of 270gCO2e/kWh – which is the criteria for “do no significant harm” (one of the key principles of the rules) to the environment.
The co-generation industry is complaining that things are moving too fast; it was only a year ago that the Emissions Performance Standard of 550gCO2/kWh for electricity generation units participating in the capacity mechanisms entered into force.
What is the EU Taxonomy?
The EU Taxonomy is a detailed list of business activities that are considered clean based on six objectives:
- Climate change mitigation
- 2.Climate change adaptation
- Sustainable use and protection of water and marine resources
- Circular economy
- Pollution prevention and control
Activities can fall under one of three categories:
- Business activities that are already ‘low carbon’, i.e., with only minimal net additional GHG (quantified in tons of carbon dioxide-equivalent) within the relevant time frame;
- Business activities that contribute to the transition to net-zero GHG emissions by 2050, but cannot be considered ‘low-carbon’ yet; or
- Business activities that enable others to become ‘low-carbon’.
Investors see opportunities
Investors have welcomed the proposals.
Between January and October, last year, €151bn in ESG funds flowed into Europe, over three quarters more than in the same period in 2019, according to Morningstar.
Amidst concerns about current greenwashing, it is hoped the new EU will improve reporting standards.
“It is hard to overstate the impact that the regulations will have,” Thomas Tayler, senior manager at Aviva Investors’ Sustainable Finance Centre for Excellence, told the Financial Times.
“It is going to change the way people run their businesses by putting sustainability right at the heart of the investment process,” he said.
It’s expected the EU framework will cause a surge in sustainable fund launches, as asset managers rush to adapt their products to the new specifications.
PwC expects the proportion of total European assets accounted for by ESG funds to jump from 15 per cent to 57 per cent by 2025, with most of this growth coming from non-ESG funds becoming compliant with the new regulations.
But this changing landscape is hard to navigate for investors because there are few signposts and those that exist point in different directions.
Moreover, it is up to asset managers to declare if they are complying with ESG, rather than there being independent oversight.
New obligations on companies on sustainability disclosures will be imposed by the EU as part of a revision of the Non-Financial Reporting Directive, to make it easier for asset managers to determine the sustainability of potential investments.
Even so, the Dutch financial regulator and its French counterpart, the AMF, which now requires local funds to comply with minimum thresholds in order to market themselves as ESG, wants to see similar rules introduced at EU level to safeguard investors and protect the credibility of ESG investing.
It is also calling for EU-wide oversight for ESG data and rating providers, which have come under fire over their inconsistent methodologies.
EU Taxonomy roadmap
Here’s the roadmap. It remains to be seen whether it gets Europe to where the Commission wants it to be.
• 10 March, 2021: Entry into force of Sustainable Finance Disclosures Regulation. Asset managers required to define entity-level ESG policies and make ESG disclosures in pre-contractual documents.
• Q1 2021: European Commission expected to kick off review of the Non-Financial Reporting Directive governing corporate ESG disclosures.
• 1 January, 2022: First deadline for asset managers to submit annual product-level ESG disclosures in line with SFDR. Asset managers required to report on climate change mitigation and adaptation in line with the EU taxonomy.
• Q1/Q2 2022: Expected application of rules obliging financial advisers to take into account clients’ sustainability preferences.
David Thorpe is the author of Energy Management in Industry and One Planet’ Cities: Sustaining Humanity within Planetary Limits and is director of the One Planet Centre Community Interest Company in the UK.