The Swedish pension fund AMF and other investment stakeholders have warned of unintended consequences if the European Commission’s proposal for screening criteria for its sustainability taxonomy regulation becomes law in its current form.
More than 46,500 respondents gave feedback to the public consultation on the draft delegated regulation, which sets out criteria for determining when economic activities can be deemed to contribute substantially to climate change mitigation and adaptation – as well as when they can be considered to cause significant harm to other environmental objectives within the context of the EU taxonomy.
In its submission, AMF said that in the long-term, some of the potential of forestry, hydropower, real estate and electricity networks to help with the green transition could be wasted because of the draft criteria.
For these four sectors, the criteria were not in line with the objectives of the EU’s sustainable finance plan, but instead risked having the opposite effect, AMF contended.
“The relative demand for these products may decrease and the raising of capital for these activities will be made more expensive by the proposal,” the Swedish pension fund said.
European asset management industry association EFAMA said in its consultation response that the EU taxonomy was at risk of hampering green housing investments.
For the taxonomy to have a positive impact on cost reduction for sustainable housing and green property development, the proposed criteria for construction, renovation and ownership of buildings needed to be revised, the lobby group said.
“The current proposal would be detrimental to the decarbonisation of EU’s building stock by restricting the issuance of taxonomy-aligned green bond volumes,” it said.
The stringency and lack of economic viability of the criteria would be particularly counterproductive for the covered bond and green mortgage bond markets, EFAMA said.
Another of the key concerns listed by EFAMA was that taxonomy alignment at the time of issuance of a financial product or instrument should apply for the product’s entire duration – or at least for long enough to mitigate concerns over future technical screening criteria non-alignment.
EFAMA also said it was worried that because of the “ESG data challenge”, most companies would not be ready to implement the new disclosure requirements on 1 January 2022, leaving financial market players with no choice but to rely on estimates and third-party screenings.
‘Discouraging for institutional investors’
Meanwhile, in feedback from the Principles for Responsible Investment (PRI) on the proposed regulation, the body emphasised that the EU taxonomy had to remain based on best available scientific evidence.
“As legally binding instruments, it is necessary that the taxonomy delegated regulation receive appropriate scrutiny before its final adoption,” the UN-backed organisation said.
“In this context, the PRI considers it crucial that the technical screening criteria remain based on the best available scientific evidence, as required by the taxonomy regulation,” it said.
This echoes warnings from scientists and civil society groups. Earlier this month, more than 100 scientists wrote to the European Commission about a “critical oversight” that meant its proposed screening criteria were disconnected from the EU’s goal of reaching net-zero greenhouse gas emissions by 2050.
Among specific points the PRI focused on in its response, it highlighted the criteria for forest activities, saying these had been tightened but that investors were concerned this change was not an improvement to recommendations from the Technical Expert Group on sustainable finance, which advised the Commission.
According to the EU Green Deal, the Paris Agreement, and the UN SDGs, sustainable forestry and timber production were both direct and indirect mitigants of climate change, the PRI said.
However, it said the revised criteria for sustainable existing forest management contradicted this, arguing that for forestry investments to be considered sustainable, they had to be of a conservation or impact-investing kind.
“The new criteria have been tightened to such a degree that they are unattainable at large and thus discouraging for institutional investors,” the PRI said.
Despite the critical points made, AMF, EFAMA and PRI all prefaced their responses with overall support for the EU taxonomy work and its aims.