Compatible Taxonomy? Always a game of patience...

A lot has changed over the past year with regard to the SFDR regulation and the EU Taxonomy, but the complexity of the subject remains.

Recall that in order to direct investments towards a more environmentally and socially sustainable economy, the European Taxonomy aims to define a common language, to classify companies' ‘green’ activities through specific selection criteria and to require transparency of the environmental impact of the investment (our Billet of 21/12/2020). To qualify as a sustainable activity, several conditions have been defined including:

• Make a substantial contribution to at least one of the 6 environmental goals (climate change mitigation, climate change adaptation, sustainable water use and protection of marine resources, transition to a circular economy, pollution prevention and reduction, protection and restoration of biodiversity and ecosystems).

In the context of climate change mitigation and adaptation, there are 3 categories of ‘eligible’ activity: Activities that contribute substantially (green activity), activities that enable a substantial contribution (enabling activity), activities that are less CO2 intensive than the sector average (transitional activity). In order to be ‘aligned,’ these activities must meet a selection criterion (GHG emission threshold for example), the Do Not Significant Harm criterion (not negatively affect other environmental objectives) and have minimum social and human rights guarantees.

While the topic remains clearly defined (55% decrease in CO2 emissions in 2030 and carbon neutrality in Europe in 2050), the scope and implementation dates have changed.

Thus, from January 2022, financial market participants must disclose, under the SFDR, the alignment of investment funds using a still incomplete taxonomy (covering at this stage only 40% of the economic activities of listed companies operating in the EU) and based on data that do not exist (indeed non financial companies must publish their alignment only from January 2023).

Source : JP Morgan

Note that the Commission has also confirmed its intention to regularly review the performance thresholds for each of the 102 economic activities, in order to monitor scientific progress within them.

In addition, the historical debates on taking into account the proposed performance thresholds to determine whether activities related to nuclear energy and natural gas could be considered ‘green’ ultimately led to the inclusion of these two sectors of activity within the Taxonomy at the beginning of the year. This reflects the complexity of the transition to a low carbon economy in a context of an energy crisis in Europe resulting in high price volatility.

To do this, it is planned to include several conditions:

• For nuclear power, on waste treatment and the dismantling of facilities, permits to build new power plants are to be established before 2045 and work to extend the life of the reactors before 2040.
• For gas fired power plants, emissions of less than 100g of CO2 per kWh, those that obtained their building permit before 2030 will have a higher emission threshold, up to 270g of CO2/kWh. Existing infrastructure, much more polluting (coal), will have to be replaced and use ‘at least 30% renewable or low carbon gas as of 2026,’ then ‘55% in 2030...’

Once the experts have been consulted (21 January), the text will be submitted to the European Parliament and the Council, which will have 4 months to speak. Objection to the text is possible in a reverse enhanced qualified majority vote for the Council (at least 20 Member States, representing at least 65% of the EU population) or a majority vote of its members (at least 353 Members) in plenary for the European Parliament.

Companies will therefore have to act on the transformative and dynamic factor of their investments (capex, opex) to increase their green share. For their part, investment companies, given very divided opinions on nuclear and gas, will probably display different levels of taxonomy alignment... European harmonization is only in its infancy.