EU Taxonomy update: climate TSC delayed, guidance on Article 8 disclosures and next steps on brown and social taxonomies

Delegated act with TSC on climate change mitigation and adaptation

On 28 September 2021, the Council of the EU requested a two-month extension to the scrutiny period for the delegated act ("DA") which contains the technical screening criteria (“TSC”) for climate change adaptation and mitigation under the EU Taxonomy Regulation (the “Taxonomy Climate DA”). See our previous blog post for details of the DA.

The Taxonomy Climate DA was formally adopted by the European Commission in June and is currently under review by the European Parliament and Council. The scrutiny period was initially four months and was intended to last until 8 October 2021. However, the Council has now requested a two-month extension of the scrutiny period to 8 December 2021.

It had been expected that the disclosure obligations in respect of the climate TSC under the Taxonomy Regulation would apply from 1 January 2022, but the extended scrutiny period now calls into question whether this timeframe will be met. 

If no objections are raised during the scrutiny period ending on 8 December, the Taxonomy Climate DA will be published in the Official Journal of the EU and enter into force on the twentieth day thereafter. However, if there are objections from Member States (or the European Parliament) and approval is not granted before 8 December, implementation of the Taxonomy Climate DA by the 1 January deadline will be challenging. The European Commission has declined to make any immediate decisions in relation to postponing or delaying the application of the rules, but it has said it will need to continue to monitor the situation.

If the European Parliament or Council object to the Taxonomy DA, it will not enter into force and the European Commission will be required to redraft the legislation. They cannot amend the DA so they have to either approve or reject it in full. This will have implications for the Level 1 rules already in place and could be a significant blow to the EU’s ambitions of being a global leader in sustainable finance.

Why the delay? Nuclear and natural gas 

In April, the European Commission announced that nuclear and natural gas power generation would not be included in the Taxonomy Climate DA. Instead, a supplementary delegated act will cover (i) nuclear energy (subject to a review of the "do no significant harm" aspects of nuclear energy by independent experts), and (ii) natural gas and related technologies as transitional activities (insofar as they fall within the limits of Article 10(2) of the Taxonomy Regulation). The European Commission has also committed to consider specific legislation to support the financing of certain economic activities in the gas sector that contribute to reducing greenhouse gas emissions but which fall outside the scope of the EU Taxonomy. The supplementary delegated act is expected “as soon as possible after the end of the specific review process expected in summer 2021”. 

A number of EU Member States have indicated that they are not willing to provide the green light on the Taxonomy Climate DA until they have reviewed the European Commission’s proposals for the remaining economic activities.

To give you a taste of what else is happening, on 27 September, the European Parliament voted down three separate resolutions from MEPs which attempted to block the Taxonomy Climate DA. The European Parliament's Plenary is now expected to adopt an early non-objection to the DA (i.e. to provide the green light) at its next session on 4-7 October.

The other 4 environmental objectives in the TSC

The Taxonomy Climate DA covers two of the six environmental objectives set out under the EU Taxonomy.

On 3 August, the EU Platform for Sustainable Finance (“PSF”) (which is advising the Commission on the Taxonomy) published for consultation a draft report with preliminary recommendations on the TSC for the four remaining environmental objectives under the EU Taxonomy, namely water, circular economy, pollution prevention & control, and biodiversity & ecosystems (see our previous blog post).

Following an extension of the consultation period, the PSF’s recommendations are now expected to be presented to the European Commission in the week commencing 29 November. These recommendations will be used by the Commission as the basis for a separate delegated act which is expected to be adopted in the Spring of 2022 and apply from 1 January 2023.

Commission guidance on the Taxonomy Article 8 DA and disclosures

The delegated act under Article 8 of the EU Taxonomy Regulation (the “Taxonomy Article 8 DA”) was adopted by the Commission on 6 July and is subject to a 4-month scrutiny period until 7 November (which can be extended by another 2 months).

Article 8 requires undertakings covered by the Non-Financial Reporting Directive (“NFRD”) to publish information on how and to what extent their activities are associated with economic activities that qualify as “environmentally sustainable” under the Taxonomy Regulation. The Taxonomy Article 8 DA sets out  the content, presentation and methodology of the information to be disclosed by financial and non-financial undertakings subject to the NFRD (see our previous blog post).

In relation to products under Article 8 and Article 9 of the Sustainable Finance Disclosure Regulation (“SFDR”), the market still lacks clarity on what is expected regarding disclosures from financial market participants for Articles 5 and 6 of the EU Taxonomy.

In response, the Commission is considering issuing a Q&A before January 2022 with guidance on Taxonomy-eligibility reporting and general legal interpretation, covering legal interpretation of the Taxonomy Article 8 DA and implementation guidance for the reporting year 2022.

The Commission is also considering complementing this with Level 3 guidance on reporting Taxonomy-alignment with the European Supervisory Authorities ("ESAs") before January 2023.

Brown and Social Taxonomies

The main focus of the PSF is now on working on the feedback received to the public consultations on the “brown” and social taxonomies (see our previous blog post). 

The PSF’s final recommendations on those taxonomies are expected to be delivered to the Commission on 20 October 2021.