Platform on Sustainable Finance advice to the European Commission on transition activities in the taxonomy

Platform on Sustainable Finance advice

On 19 March 2021, the Platform on Sustainable Finance (“PSF”) delivered its advice on transition financing requested by the Commission in January.

The Commission had asked the PSF to advise it on how the taxonomy could be used to finance transition activities. Significant concerns had been raised by a number of stakeholders that the draft technical screening criteria (TSC) for climate change adaptation and mitigation under the Taxonomy Regulation that the Commission had consulted on did not take into account sufficiently the key role that certain transition activities will play in the net zero transition. As the Commission put it: “There is a need to give reassurance that the taxonomy will not block access to finance for enterprises and sectors in transition towards our climate targets.”

The PSF recommendations are grouped in three broad categories.

Maximise current taxonomy

• Communicate (more) about how the taxonomy already supports transition finance. To support communication efforts, the PSF provides several insights or additional messages beyond the basic description of the purpose and parts of the taxonomy framework that should be emphasised with stakeholders. 
• Ensure that reporting requirements enable companies, financiers and investors to communicate their transition plans. While the details of the taxonomy reporting requirements are still being resolved, the PSF already sees several opportunities and challenges around reporting that should be considered to better support transition finance:
  • ensure that the reporting requirement for banks under the Article 8 delegated act are carefully balanced to ensure that SMEs and households seeking access to green finance are – by extension - not overly burdened with information requirements;
  • provide a coherent view on sustainability reporting obligations under the Sustainable Finance Disclosure Regulation (SFDR), Non-Financial Reporting Directive (NFRD) and Taxonomy Regulation;
  • encourage companies to disclose their transition corporate strategies and to specify how the taxonomy fits within these strategies; and
  • ensure that disclosure of taxonomy-aligned CapEx is given equal importance as disclosure of taxonomy-aligned turnover.
• The taxonomy should include more enabling activities:
  • across different sectors focussed on energy efficiency that can be performed by any company (through CapEx), starting with manufacturing, agriculture, and forestry; and
  • which recognise the contribution of the entire supply chain around taxonomy-aligned activities by financing, distributing, and selling of taxonomy-aligned products or services or by providing critical materials to taxonomy-aligned activities.
• Recognise activities that are part of an activity-specific investment plan to meet the taxonomy criteria, through CapEx, OpEx and related finance. To provide companies that perform activities that do not (yet) meet taxonomy criteria with access to transition finance, the PSF recommends (subject to the establishment of criteria for sufficiently robust activity-specific investment plans) that the taxonomy allow companies to count as taxonomy-aligned investments towards meeting the TSC in the future. These investments should cover CapEx, OpEx and related finance.
• Provide clarity to stakeholders on when new activities will be considered for inclusion in the taxonomy and how they can engage with the PSF. The PSF recommends prioritising the launch of a ‘feedback loop’ that gives stakeholders the opportunity to provide suggestions to the PSF on what activities should be considered next for inclusion in the taxonomy and whether criteria for existing activities should be revised. The PSF also recommends setting out clearer timelines for the assessment of new activities.
• Update the delegated act with the climate change TSC to recognise similar activities across different sectors. The PSF recommends updating the delegated act to ensure activities have consistent boundary descriptions and similar activities (e.g. repair or service activities) and are recognised consistently across different sectors.

Develop future taxonomy

• Develop criteria for activities with no significant impact. Clarity on what activities have little or no impact could help companies and financiers make investment decisions towards the net zero transition. The PSF will provide initial recommendations on this by May 2021 and a final report by September 2021.
• Develop criteria for activities that cause significant harm. The PSF is currently exploring the extension of the scope of the taxonomy to define activities that significantly harm the taxonomy’s environmental objectives. This could be an important tool for the transition as it would identify activities and performance levels that companies, financiers and others must move away from. The PSF will provide initial recommendations by May 2021 and a final report by September 2021.
• Support and define improvements in performance levels between substantial contribution and significant harm. As part of its work on extending the taxonomy to no significant impact and significantly harmful activities, the PSF is exploring the possibility to support significant improvements in performance of activities towards (but not reaching) the substantial contribution criteria. Recognising these efforts may help companies report on their transition.
• Include activities that enable companies to stop performing significantly harmful activities. Closely linked to the work on developing criteria for significantly harmful activities, the PSF is considering the idea of identifying in the taxonomy activities that could make a substantial contribution by enabling the stopping of activities (through decommissioning or closure) that cannot improve to a level of performance better than significant harm. By defining these activities, companies and financiers can get recognition for these highly necessary transition efforts.

Use other policies and tools

• Financial product labelling. The PSF recommends that the Commission confirms and explains the link between the forthcoming EU Green Bond Standard and the taxonomy and clarifies how companies can voluntarily disclose the level of compliance of their green bonds with the taxonomy. The PSF also recommends that the Commission indicate whether taxonomy disclosure obligations might be extended to other financial instruments, such as bonds. The PSF also recommends that consideration is given to grandfathering arrangements for labels as many investments will extend beyond the time within which the taxonomy criteria are tightened.
• Establish activity-specific transition pathways based on taxonomy criteria. To support companies to transition from significant harm to substantial contribution, the PSF recommends considering using the taxonomy criteria to establish transition pathways for certain environmental performance levels, that could be applied to specific economic activities. Performance of the activity would have to improve to substantial contribution over the defined transition timeframe.
• Utilise metrics and tools outside the taxonomy, including the Climate Transition Benchmark. To allow companies to demonstrate their transition plans, the PSF recommends establishing and using other metrics than just taxonomy-alignment percentage – such as TCFD metrics, science-based targets and sector pathways or transition scenarios. In particular, the PSF recommends using the requirements in the Climate Transition Benchmark to define climate transition on company level.

Next steps

The Commission will now consider the PSF advice when finalising the delegated act with the climate change TSC, as well as when preparing the Renewed Sustainable Finance Strategy and other sustainable-finance related initiatives.

The Commission is expected to adopt the delegated act with the TSC on climate change adaptation and mitigation on 21 April 2021. It is also expected to publish a Communication on the taxonomy at the same time.

Once the delegated act has been adopted by the Commission, it can only enter into force if the European Parliament and the Council do not object within a period of four months, which can be extended by two months if requested by either the European Parliament or the Council.

The taxonomy for the first two environmental objectives, climate change adaptation and mitigation, will then apply from 1 January 2022.

The TSC for the other four environmental objectives in the taxonomy (water, circular economy, pollution prevention and control, and biodiversity) are still being developed and will only apply from 1 January 2023.

Linklaters materials

• Publication: Sustainable Finance Sources: survival guide
• Publication: EU Taxonomy Regulation: detailed analysis
• Blog post: EU Taxonomy Regulation: delay to technical screening criteria
• Webinar recording: What the EU sustainable finance package means for corporates
• Webinar recording: ESG reporting for corporates