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An important step forward to European climate neutrality also points to an urgent need for reform

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Wind turbines in Molsheim, Germany
Wind turbines in Molsheim, Germany. Photo by Karsten Würth on Unsplash.
  1. Private sector firms need clear signals about the direction of travel for the European economy so that they can invest in future-fit economic activities.  
  2. Strong restrictions on use of fossil fuels for power generation are a European success story. This will support implementation of Climate Law and support international climate ambition. 
  3. Decisions on some other sectors have caused division and remain contentious. Process and governance issues around the taxonomy must be fixed urgently if the credibility of the instrument is to survive in the longer term. 

Story 

The European Commission on Wednesday published a package of sustainable finance measures to combat greenwashing, improve transparency and redirect financial flows towards sustainable technologies and businesses. Measures include the long-awaited Taxonomy Delegated Act on climate change mitigation and adaptation under the Taxonomy Regulation. The European Parliament and the Council will now need to adopt or reject the Commission’s draft. 

Simultaneously, the Commission published legislative proposal for Corporate Sustainability Reporting Directive (CSRD) on sustainable disclosures which reforms the EU Non-Financial Reporting Directive (NFRD), establishing mandatory sustainability reporting standards 

Both initiatives are important and novel financial sector tools for attaining the goals set out under the European Green Deal and the European Climate Law, also adopted yesterday. Both have been long awaited by civil society and businesses alike.  

The Taxonomy – intended to define green economic activities to inform and guide investors but now seen as Europe’s definition of ‘what is green’ – has recently been a battleground for political and business interests. The Commission has decided to retain strict guidelines on the use of fossil fuels for power generation. This is an important decision for European policy which keeps the taxonomy in line with the investment policy of the European Investment Bank. It also supports the implementation of the Climate Law and will support international collaboration on financial reform with the United States and other major economies. 

However, although the Act retains its scientific integrity in relation to fossil fuels, a potential loophole in the text allows further discussion of contentious issues including gas and nuclear energy. Furthermore, the criteria for forestry and bioenergy remain problematic and have not been removed from the draft as previously requested by civil society in aopen letter to the Commission. 

The process of finalizing the Delegated Act has thrown into sharp relief the difficulty of reaching political consensus that also respects hard science. Despite efforts to create a strong and independent governance process for the taxonomy, final decisions were made through a bargaining process between Member States and behind closed doors. For Europe’s definition of ‘what is green’ to remain credible in the future, urgent reforms to governance and transparency must be undertaken. 

Quotes 

Kate Levick, Associate Director – Sustainable Finance, E3G said: 

These new measures are a step in the right direction for climate neutrality that bodes well for international cooperation. However, the decision-making process between European institutions has not worked as it should, and urgent reforms to governance are needed if the taxonomy is to remain credible.   

Tsvetelina Kuzmanova, Policy Advisor of E3G said: 

“In recent months the EU Taxonomy has become a battleground for fossil fuel interests. The Delegated Act as it stands today is by no means a perfect tool. But by standing firm against the immense pressure from lobbyists, and not allowing unabated fossil gas in the Taxonomy, Europe has made a decision which it can be proud of. It must stick to this position and avoid at all costs any perception of backsliding in coming months.”

Claire Godet, Researcher at E3G said: 

“Criteria for problematic sectors such as forestry and bioenergy have not been addressed, some have even been watered down. This sets a dangerous greenwashing precedent of compromising science in the Taxonomy to appease supposedly ‘green’ Nordic Member States. Europe should never again allow national politics to distort a science-based tool and we will be closely watching the next round of discussions. 

Eleonora Moro, Researcher at E3G said: 

“The proposed thresholds for hydrogen production and distribution do not guarantee the taxonomy classification of the only type of sustainable hydrogen: green hydrogen. The inclusion of retrofitting gas transmission and distribution networks goes against the logic of efficient hydrogen deployment in priority sectors that have no other decarbonisation alternatives available.” 

On the Corporate Sustainability Reporting Directive 

Kate LevickAssociate Director, Sustainable Finance, E3G said: 

“We are delighted to see in the new proposals many of the elements that E3G recommended to the Commission in 2020, including greater use of assurance and electronic reporting. These reforms set the path to putting sustainability reporting on an equal footing with more traditional financial reporting.” 

Tsvetelina Kuzmanova, Policy Advisor, Sustainable Finance, E3G said: 

“One of the most beneficial and constructive aspects of the new proposal is that sustainability risks and reporting are underpinned by the ‘double materiality principle’. This reports on both how sustainability issues affect the company, and what the company impact is on people and the environment. Disclosing all material sustainability information will lay the ground for a robust transparency framework to inform investors.”

 

Extending the scope of the Directive to cover all large companies and listed small and medium-sized enterprises is yet another positive improvement of sustainability reporting requirementsThe current scope, however, does not include obligations for non-listed SMEs. Achieving climate neutrality would depend on measuring and accounting for the sustainability impact of all businesses, especially those in high-impact sectors. Moreover, the 3-year delay period for SMEs reporting is a serious mismatch with the European Climate Law 2030 emissions reduction target.   

 

The Commission’s draft is a step in the right direction and a historic opportunity for the EU to support companies in effectively transitioning their businessesIt comes none too soon as the Biden Summit today includes strong announcements from the United States and others on the coming economic and financial transformation to net zero.”  

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