Comment

MEPs continue the fight on EU Taxonomy

Mark Foster / May 2022

Image: Shutterstock

 

The politics of climate change and the Green Deal have become a whole lot harder in Europe since the Russian invasion of Ukraine. Before that tragic situation materialised, I wrote in January that the European Commission (EC) could win the battle on the EU Taxonomy Delegated Act (DA) but still lose the war, concluding that the EC need to navigate the politics carefully to avoid social unrest.

It seems the European Parliament (EP) has not yet given up on thwarting the EC’s ambitions on the taxonomy battlefront. Whilst the EP might be right in principle to challenge the EC on process, it would be politically unwise (and counterproductive) to block the DA.

A quick recap on timing/process: On 2 February the EC college provisionally adopted its draft Delegated Regulation as regards “economic activities in certain energy sectors and specific public disclosures for those economic activities” (commonly referred to as the ‘Complementary Delegated Act’ or ‘CDA’ for gas and nuclear). It was officially adopted on 9 March. Essentially, the EC decided to include nuclear and gas, under certain conditions. Article 23(6) of the Taxonomy Regulation gives the co-legislator 4 months (extendable by an additional 2 months) from the notification date to examine the act. Under the scrutiny process EP and Council can approve or object to the delegated act but not amend it.

A group of cross-party MEPs is agitating to object. They have drafted a motion for resolution to be debated and voted at an upcoming plenary session. They reiterate their objection to the inclusion of gas and nuclear on substance, stating concern that such a stance “constitutes an evident departure from a science-based approach that risks weakening the integrity of sustainable finance” and would create “fragmentation and confusion in EU markets, undermining the Taxonomy’s credibility as a guide for investments”.

But the bulk of their complaint seems more focused on procedural aspects. In several paragraphs MEPs complain about the way the EP has not been treated as co-legislator on an ‘equal standing in the decision-making process’, citing procedural failures by the EC under Better Regulation Guidelines, including a lack of impact assessment and public consultation. These latter concerns were raised in a formal letter co-signed by LIBE and ENVI Chairs.

The MEP’s criticism of the process undertaken by the EC regarding the Complementary Delegated act do seem justified. The EC consulted with Council (Member States Expert Group on Sustainable Finance) and its own Platform on Sustainable Finance in January (i.e. prior to formal adoption) but chose not to hold similar consultations with the EP or more publicly, though an EP scrutiny session was held on 22 March (i.e. after adoption). Given the well-known political sensitivities on this issue – the primary reason for not including gas and nuclear in the original DA the previous year – it does seem naïve to think that such uneven handed treatment between the co-legislators would not go unnoticed.

Despite these legitimate procedural concerns, it would be politically foolhardy for the EP to object to the DA given the current geo-political context. The Platform on Sustainable Finance is correct in its response to the CDA that the CDA ‘cannot solve energy sector transition policy beyond environmental performance’, a point reiterated by an EP briefing from February. But the war is rightly leading to a radical rethink of energy policy and security in Europe. Blocking the CDA will only take us back to the drawing board on the taxonomy, delaying a pressing process even further. It would cause even greater uncertainty to markets, making it harder for financial institutions to support their clients in the transition (hence why the financial industry broadly supports the DA) and reducing investor appetite for ESG products. Such an outcome would surely hinder, not help the transition to a more sustainable economy.

As I wrote in January, I still believe the CDA will be adopted. Despite the cross-party signatories to the resolution to object, it seems unlikely these individual MEPs will be able to rally their groups to secure a simple majority in plenary, not least given Member States and the EC will undoubtedly be lobbying hard in the background.

MEPs expressing concern are no doubt sincere in their opposition to the DA, whether on process or on substance. Whilst I respect this stance, even having sympathy for their procedural gripes, I believe the EU’s broader political and policy interests would be better served by allowing the CDA to be adopted and apply as of 1 January 2023. Even then, industry will have scant time to prepare given the delays in obtaining certainty via this lengthy procedure.

ESG issues will only become more important - and politically challenging - as geo-political tensions look set to remain and the macro-economic environment hits citizens’ pockets even harder - through high energy prices, broad-based inflation, and interest rate hikes. If the EC does ultimately win the Taxonomy battle, there are still many lessons to be learned for the next phase.

  

Mark Foster

Mark Foster

May 2022

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