Two new reports published by Platform on Sustainable Finance

Keywords: Mazars, Thailand, Sustainability, LEnvl, EU

27 May 2022

The first report, published on 29 March 2022, presents the Platform’s recommendations on whether and how to extend the taxonomy to new sectors and economic activities that are not currently covered. The report acknowledges the need to provide institutional investors with the tools to finance environmental transition by a broader range of economic actors, not limited to those that already possess the technological solutions to achieve the environmental performance thresholds set out in the current taxonomy.

The Platform is thus proposing to classify all economic actors into four categories, divided into two “blocks”, based on their current environmental performance:

• activities that cause significant harm to the environment (taking account of all objectives, not just the climate-related ones) and that are classified as “red”. These can be further divided into:
  • those for which there is not, and can never be, a technological solution that would reduce their negative impact to a level where it does not cause significant harm. The only transition solution is to cease the activity and decommission the assets, as a matter of urgency;
  • those for which there are technological solutions that would improve environmental performance to a level where they do not cause significant harm. There is an urgent need to finance the technological transition that would allow them to move into the “amber” category;
• activities that do not cause significant harm, but nor do they make a substantial contribution to the environmental objectives. These can be further divided into:
  • those that may be able to improve their performance (even if they may never be able to attain the “green” classification awarded to activities covered by the current taxonomy). Here, the goal is again to finance the technological transition, with a view to encouraging better environmental performance. This category is labelled “amber”;
  • those that have a negligible impact on the environment (such as consulting or education), for which there are no significant opportunities to improve environmental performance. The issue here is not so much about financing transition, as about not automatically excluding them from sustainable financing channels. Whereas for other activities the evaluation criteria are primarily green turnover and investments, for these “low environmental impact (LEnvl) activities”, access to green financing could be based on their green operating expenditure - i.e. their use of green technologies provided by other economic actors, starting with renewable energy and using consumer goods that comply with the principles of the circular economy.

The Platform does acknowledge that extending the taxonomy in this way could increase complexity and implementation costs, and would also involve developing numerous additional technical criteria for the assessment of “substantial contribution” and “significant harm”, which would take time.

The second report, which was published on 30 March 2022, covers the equally eagerly-awaited technical criteria for the four other environmental objectives (pollution, sustainable use of water and marine resources, biodiversity and ecosystems, and the circular economy).

Neither report is binding: they simply represent the expert technical advice provided by the Platform to the Commission, which still needs to study the proposals before deciding whether to implement them. The Commission is under pressure to reach a quick decision on the second report, which is six months late and thus risks compromising the implementation of taxonomy reporting requirements for the non-climate-related objectives. 

These requirements were supposed to come into effect for the 2023 financial year. It will probably take the European Commission several months to study the recommendations and reach a decision. This will make it very difficult to adopt the Delegated Act – which would implement the technical criteria and the associated reporting requirement – by the target date of June 2022 (which was already slightly delayed from the original roadmap). Realistically, it is more likely that the Commission will aim to adopt the Delegated Act by the end of 2022, which will probably necessitate delaying its entry into force until the 2024 financial year. We will keep you posted.

It may take even longer for the Commission to reach a decision on the first report, dealing with the possible extension of the taxonomy. There is a lot at stake here, and the Commission has already faced some difficulties with the first iteration of the green taxonomy. It may therefore prefer to take the time to observe the initial impacts of the taxonomy, and gather feedback on it, before considering extending it. Again, we will keep you posted.