ESG – the PSF adds to the Commission’s woes on gas and nuclear

On 24 January 2022, the Platform for Sustainable Finance (PSF) published its response to the European Commission’s request for feedback on the draft Complementary Delegated Act (CDA) on gas and nuclear energy.

The CDA would amend the two Delegated Regulations (on TSCs here and KPIs here) made under the Taxonomy Regulation in December 2021 so investors can identify if economic activities under the Taxonomy Regulation include gas or nuclear activities and, if so, to what extent.

What’s the background to this response?

As we reported earlier this month, the European Commission intends to put forward a proposed CDA by the end of this month but the work has been plagued with diplomatic and environmental problems throughout.

Before it can formally present a legislative proposal to the European Parliament and the Council of the EU, though, it must first consult the Platform on Sustainable Finance (PSF) on its draft plans.

The Commission’s request to the PSF was made on 31 December 2021 – it initially asked for feedback by 12 January, though this was later extended to 21 January 2022.

The PSF makes clear in its response the difficulty that this very short turnaround posed - as the response notes, consensus ‘was not pursued or achieved on all points in the time available”.

What has the PSF said in response?

The response gives the PSF’s comments on the draft technical screening criteria (TSC) proposed in the CDA, with a focus on environmental performance and usability aspects.

Overall, the comments made are fairly critical –

• the PSF does not consider that the nuclear and gas activities included in the draft CDA are in line with the Taxonomy Regulation;
• most of its members believe that there would be a serious risk of undermining the Taxonomy Regulation’s framework; and
• the response also highlights concerns as to the operation of the draft TSCs and notes that many of its members are ‘deeply concerned’ about the environmental impacts that may result.

What are the key points in the PSF’s response?

The PSF sets out four areas of feedback and recommendations in respect of the TSCs in the draft CDA.

1. The overall approach to the draft CDA activities

The PSF’s response notes that

• the TSCs in the draft CDA TSCs differ in fundamental ways from those in the existing Climate Delegated Act;
• they are not consistent with the provisions of the Taxonomy Regulation (specifically Article 10.2 and Article 19); and
• as a result, the draft CDA activities “could not be considered sustainable within the meaning of the Taxonomy Regulation”.

The PSF recommends that:

• the Commission takes “adequate time” to address and act on the platform feedback to ensure consistency with the Taxonomy Regulation, and to allow sufficient time for impact assessments.

2. Activity 4.29 (energy generation from gaseous fossil fuels)

The PSF’s response notes that

• only the first TSC for climate change mitigation (ie, 4.29 1a)) ensures a substantial contribution to climate change mitigation from individual gas-fired energy facilities.
• the alternative TSCs (ie, 4.29 1b)) allow GHG emissions above the Do No Significant Harm level contained in the existing Climate Delegated Act and may stay that way for the life of the investment.
• the combined TSCs (at para 4.29.1b) would not ensure substantial contribution to climate change mitigation by the investable asset, consistent with limiting warming to 1.5 degrees.
• a new facility which generates energy from gaseous fossil fuels would start operation with emissions above the ‘Do No Significant Harm’ (DNSH) level and would not have to reach the substantial contribution level at any stage over 20 years.

The PSF recommends that:

• criterion 4.29 1b) should be removed while criterion 1.a) (emissions of under 100g CO2e/kWh on a life cycle basis the from generation of electricity using fossil gaseous fuels) is maintained as this is the science-based, technology neutral approach consistent with other energy activities in the existing climate delegated act.
• any criteria for GHG emissions above 100g CO2e/kWh on a life-cycle basis could use an alternative Taxonomy treatment such as an Intermediate Performance (or Amber zone) in any extended Taxonomy beyond green. (The PSF notes that it is to publish its final proposal in the “coming weeks”).

3. Activities 4.27 (new nuclear energy facilities) and 4.28 (existing nuclear energy facilities)

The PSF’s response notes that

• the proposed TSCs do not ensure:
  • no significant harm (Article 17 of Taxonomy Regulation) to the sustainable use and protection of water and marine resources;
  • the transition to a circular economy;
  • pollution prevention and control; or
  • the protection and restoration of biodiversity and ecosystems,
• they would require substantial changes to do so.
• in the case of new nuclear plants, the TSCs do not ensure a substantial contribution to 2050 climate neutrality goals and would require substantial changes to do so.

The PSF recommends that:

• Activities 4.27 and 4.28, as defined by the TSCs should not be considered as taxonomy aligned as that they do not ensure DNSH and therefore do not meet the requirements under the Taxonomy Regulation.

4. Disclosure and verification requirements:

The PSF’s response notes that

• the draft disclosure arrangements in the draft CDA are “unsuitable for financial markets” as they do fail to sufficiently distinguish the draft CDA activities from other Taxonomy aligned disclosures; and
• the measurement and verification requirements are insufficient for monitoring performance of the TSCs in the draft CDA and, as a result, also for assessing taxonomy alignment.

The PSF recommends that:

• should the draft CDA criteria be adopted as proposed (or in a similar form), future corporate and financial product disclosures should be materially enhanced, and verification requirement changed in order to avoid misleading claims about the environmental performance of economic activities and financial products.

What next?

Given the nature of the PSF’s comments, it is hard to see that the Commission can persevere with its original plan to adopt the draft TSCs before the end of January 2022. We will, though, be monitoring the situation closely and will report on any significant developments.

The PSF response does offer one crumb of comfort when it states that, to help the Commission in its deliberations on ensuring the facilitation of a just energy transition, the PSF will respond “within weeks” to the Commission’s request to develop a proposal for an extended Taxonomy.

The PSF is developing this with an intermediate performance category (Amber) and an unsustainable category from which there must be an urgent and just transition.

The PSF considers that this approach is necessary since the existing green Taxonomy was “not intended to include every activity in the economy, in particular energy activities that must transition because emissions are currently too high or significant harm is present”.