Sustainable growth is essential for achieving the green transition. But much more needs to be done to reach the goals of the Paris Agreement and the EU’s Green Deal and move to a climate-neutral society.
There is a broad consensus that substantial investment, both public and private, will be essential in delivering the green transition. The Confederation of Swedish Enterprise is in favour of initiatives supporting investments that contribute to sustainable development and strengthen the conditions for those Swedish companies already taking considerable responsibility for sustainability. It is also important that the financial sector takes its share of the responsibility for achieving the green transition. But it is vital that it is science, not politics, that defines what is needed for a sustainable society.
The emergence of the taxonomy - a closed process that threatens the legitimacy of the regulatory framework
Confidence that the taxonomy framework has been properly developed and will truly promote global climate benefits is crucial for it to be perceived as legitimate, both by companies and investors. The Taxonomy Regulation was adopted on 1 July 2020, but the crucial elements – i.e. those decisions on the technical review criteria that determine what is classified – or not - as sustainable - are taken in delegated acts.
Although the delegated acts procedure allows for greater flexibility and knowledge through expert groups, it also risks resulting in more closed processes, where the Member States and the European Parliament are afforded only limited opportunities to influence the design of the regulatory framework.
The importance of developing the taxonomy’s technical review criteria using broad consultation and interaction with stakeholders cannot be overemphasised. In the delegated act, the European Commission may not go beyond the framework set by the Council and the European Parliament in the original Regulation.
The importance of involving the business community
Later in 2021, the Commission is expected to present its proposal for technical review criteria for environmental objectives 3-6 in the taxonomy. There will also be a discussion on developing a social taxonomy. It is essential that this work is done with a high degree of transparency, and that the business community is involved form an early stage in the work that is currently underway, for example through the Sustainable Finance Platform. Otherwise, there is a risk that the legitimacy, and the real sustainability benefits of the regulatory framework, could be undermined.
Increased administrative burden
Collecting, processing and quality checking data for reporting under the taxonomy requires extensive resources and systems support for reporting companies. Many smaller enterprises, which are not directly required to report under the Taxonomy Regulation, are indirectly affected as suppliers and subcontractors to those enterprises that are obliged to report. It is important that the benefits of the information and the impact of reporting exceed the cost of gathering it.
Reporting requirements should, therefore, focus on information that will actually be used by investors and other financial market participants. Concepts and definitions should, as far as possible, be consistent with those used in existing financial reporting frameworks. Disclosures that do not arise directly from the Taxonomy Regulation should be avoided.
The taxonomy should not be linked to other regulatory frameworks
It is conceivable that the taxonomy could be used in the context of other EU regulations, such as those affecting banks’ corporate lending. It is also likely that other future regulations may be based on the taxonomy. Given this level of potential influence, it is therefore essential that the assessment criteria are both fair and promote climate benefits. However, the taxonomy is as yet incomplete and untested.
The Confederation of Swedish Enterprise is opposed to integrating the technical review criteria into other current or future regulations. For example, the taxonomy should not set the limits for the use of funds for the green transition within the framework of the EU Recovery Fund, as is currently being proposed. Any such extension would mean that the taxonomy would wield a disproportionately large influence on what is considered sustainable.
Views of the Confederation of Swedish Enterprise on the proposal:
- The Confederation of Swedish Enterprise is fully in favour of creating greater uniformity and a common language for the financial industry on which investments will be needed to manage the transition to a sustainable society.
- We note that the proposal on the design of sustainability criteria for the climate-related elements of the taxonomy has been amended in a way that is positive overall in comparison to the proposal presented in November 2020.
- Nevertheless, a number of challenges and problems remain in relation to the current proposal, both generally and related to specific technical criteria. The proposal continues to show a lack of technology neutrality and a lack of a system perspective. The credibility of the entire regulatory framework will be based on the fact that it truly promotes climate benefits and sustainable solutions. Our assessment is that the proposal does not sufficiently support the Swedish fossil-free strategy.
- The development of new technological solutions, innovation and increased digitalisation will be a prerequisite for achieving the climate transition. We continue to detect a clear risk that the financing of this type of required investment is not sufficiently covered by the taxonomy.
- The sustainability criteria in the proposal go beyond existing legislation in several cases, for example in the Renewables and the Water Framework Directives. This could lead to an undesirable duplication of regulation and may lead to increased investment costs for, for example, electricity generation. This would ultimately have to be largely financed by Swedish companies and would thus affect their competitiveness.
- Given the growing consensus that we may double our electricity use by 2045, the Confederation of Swedish Enterprise’s main concern remains the impact of the taxonomy on our energy supply and on the transition to a fossil-free society.
- It is also evident that the importance of the taxonomy is continuously increasing. A clear example of this is that it is now clear that the taxonomy will be linked to, for example, the EU Recovery Fund.
- The introduction of the reporting requirement on the climate elements is still set at 1 January 2022. This is unreasonable given the delay in the process. Companies need to be given a longer lead time if they are to be able to collect and manage the data involved. The introduction of the reporting requirement should be delayed until 1 January 2023 at the earliest.
- Accessible, fossil-free electricity production will play a crucial role in our energy systems if Sweden is to cope with the climate transition and at the same time safeguard our competitiveness. According to a recent report by the Joint Research Centre (JRC), nuclear power could be included in the taxonomy and the analysis has offered no research-based evidence that nuclear energy is any more harmful to human health or the environment than the fossil-free generation types that are already included.
- It is unfortunate that nuclear power, which the Commission, IPCC and IEA have identified as a crucial part of the solution to meeting the climate change challenge, is not included in this dossier but follows its own separate path. Nuclear power should have been included in this delegated act already, in order to demonstrate a fully technology-neutral approach that also takes into account the system perspective of sustainable energy supply.
- The Commission will also present a complementary delegated act, after summer 2021, which will contain technical screening criteria for a number of additional areas such as agriculture, natural gas, nuclear power and certain manufacturing sectors. This approach, which has a carve-out of certain activities, is unfortunate and further undermines the importance of technology neutrality and system perspective. The Confederation of Swedish Enterprise also wants to emphasise the importance of only fossil-free energy being classified as sustainable in the taxonomy.
- The position on large-scale hydropower has shifted in a positive direction, but is still not being addressed in a technology-neutral way. However, there is still a clear risk that, according to the taxonomy, a large proportion of Swedish hydropower could be classified as an unsustainable investment.
- Solar, wind and hydro are all examples of renewable power. However, it remains the case that the requirements in order for hydropower to be classified as sustainable, for example in relation to life cycle emissions, are more stringent than those for solar and wind power. This means that the proposal is not technology neutral.
- References to existing EU legislation, such as the Water Framework Directive and the Habitats Directive, are now included in the wording on ‘Do No Significant Harm’ (DNSH) and the various environmental objectives - this is a positive development that was not evident in the previous proposal. However, there are still remaining examples where the criteria go beyond existing legislation, something which is not desirable.
- The systems perspective on our electricity supply continues to be absent. The balancing capacity of hydropower as a regulating power is an important enabler for the expansion of intermittent renewable energy, in the form of wind and solar power, in northern Europe. It is therefore most unfortunate that this important function has not been highlighted.
Bioenergy and biofuels linked to the transformation of the transport sector
- Overall, there have been positive developments in some of the wording and the treatment of bioenergy. Electricity generated from biomass is no longer classified only as a transitional solution, but is now categorised as ”long-term green”, something that we welcome.
- It remains problematic, however, that the criteria for activities related to bioenergy in some cases continue to go beyond what has been agreed in the Renewables Directive, for example in terms of carbon reduction requirements and who is covered by sustainability criteria.
- From a transport sector perspective, the reference to ‘zero tailpipe emissions’ for the measurement of vehicle emissions remains problematic, as it disqualifies biofuels. This will be detrimental to the Swedish strategy for climate change adaptation in the transport sector, which is largely based on replacing fossil-based fuels with an increased use of biofuels. The proposal could thus threaten investments and reinvestments in bioenergy, which will be needed to achieve the transport sector’s transformation in Sweden.
- The forest industry and forest raw materials will be needed to achieve the green transition.
- There have been significant and relevant improvements since the previous iteration of the proposal. Forestry is included in the taxonomy as a sustainable activity, and the proposal now takes into account that forestry is a national competence.
- A significant change concerns the replacement of the definition ‘improved forest management’ with ‘existing forest management’. This has proved important for the classification of current-day Swedish forestry as a sustainable activity.
- The technical criteria now refer to the national rules more than previously, which is positive.
- However, there are details where further analyses need to be undertaken before the assessment is complete. In addition, there are still some uncertainties and concerns over how certain elements and details should be interpreted and what effects these may have.
- The Commission also refers in the revised proposal to the forest strategy that it intends to present by the end of 2021. This may lead to adjustments to the sustainability criteria and will thus change the conditions for Swedish forestry and its ability to contribute to society’s climate transition.