“Good IED !” - The CJEU Grand Chamber “Ilva” judgment : a Kirchberg view of conciliating environmental law and human rights

 

 

Jacques Bellezit, University of Strasbourg (France)

 

Photo credit: mafe de baggis, via Wikimedia Commons

 

If one wants to trace back the history of European construction, it would necessarily have to mention the European Coal and Steel Community (ECSC). Inspired by the Schumann Declaration of May 9th 1950, it was the first attempt to put in a common market, strategic materials (coal and steel). This was done in order not only to enhance European post-war reconstruction but also to impede re-weaponization policies on both side of the Rhine, in the first years of the Cold War.

If the ECSC now belongs to history, and the use of coal is (theoretically) aimed to follow the same path under environmental treaties (such as the Paris Agreement), steel production can always be an issue in EU aw, especially under Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions (integrated pollution prevention and control  (“The IED”). 

This was the case with the Italian Ilva SpA factory, which has led to the 25/06/2024 CJEU Grand Chamber judgment in case C‑626/22, C.Z. and Others v Ilva SpA in Amministrazione Straordinaria. 

 

I) Facts and background of the case

 

The Ilva SpA steel producing plant (ISSPP) is located in the city of Tarantino (Italy) and is one of the major steel factories of the region : AG Kokott recalls in her Opinion (point 49) that the ISSP “ is the largest industrial steelworks complex in Europe, covering an area of roughly 1 500 ha and employing around 11 000 workers” in 2019. She also reminds the reader that “the Italian State still holds almost 40% of the shares” in Ilva  and “exerts particular influence” on it (point 64 of the Opinion).

Neighbours and residents of Tarantino and nearby cities seized the Milano district court for violation of their right to health, their right to peace and tranquillity in the conduct of their lives and their right to a clean climate, due to the activities of the ISSPP. 

If the ISSPP was unknown to the Kirchberg’s judges in the CJEU before the present case, the European Court of Human Rights, on its side, was very familiar with this facility. Indeed, the Strasbourg Court has condemned Italy for violations of articles 8 (right to private life) and 13 of the European Convention of Human Rights (right to effective remedies) due to Italian management of the ISSPP:

- on the part of 161 neighbours of the facility (ECHR 01/24/2019 Cordella and others v Italy)
- on the part of 39 of its current or former employees (ECHR 5/5/2022 Ardimento and others v Italy)

- on the part of 3 former employees (ECHR 5/5/2022 Briganti and others v Italy) 

All of these applicants have suffered from occupational or environment-caused conditions (such as cancers) due to exposure to toxic rejects of SO² (Sulphur dioxide) and  PM10 particulate matter emitted by the ISSPP. These rejects were consistently assessed during twenty years, by several scientific reports, from both national and international specialists between 1997 and 2017 (§13 to 31 of the Cordella judgment).

 

IED provisions and the case of the Ilva factory

Under Italian law, the IED provisions were transposed through the Legislative Decree No 152 on Environmental rules of 3 April 2006.

In 2012, the Taranto District Court ordered a provisional seizure “of the equipment of the ‘hot zone’ of the Ilva plant and all Ilva’s materials” stopping the production (Point 27 of the Ilva judgment). To counter this Order, the Italian authorities adopted several regulations, from 2012 to 2016, creating a tailor-made, sui generis legal regime aiming to maintain the ISSPP’s activities (points 27 to 35 of the Ilva judgment): 

- the ISSP was classified as “‘plant or facility of strategic national importance’”, so the “Minister for the Environment and the Protection of the Land and Sea may, when the Integrated Environmental Permit is reconsidered, authorise the continuation of the activity in question for 36 months” under the previous permit;

- the facilities were under the control of “provisional administrators designated by the government”;

- several deadlines for environmental rehabilitation plans of the facilities were rescheduled;

- in 2016 and in the frame of the ISSPP’s cession of shares to ArcelorMittal, the Environmental Impact assessment (EIA) regime was replaced by an ad hoc “Decree of the President of the Council of Ministers, which was to be regarded as constituting an Integrated Environmental Permit”.

II) Procedure and preliminary ruling of the CJEU

 

In the current CJEU case, residents and neighbours of the ISSPP seized the Milano District Court of a class-action request for “an injunction in respect of the operation of the installation or at least parts thereof to protect their rights to health, to peace and tranquillity in the conduct of their lives and to the climate. In their view, those rights have been very seriously affected for decades by the operation of the steelworks” (point 46 of the “Ilva” judgment). 

The CJEU, after having dealt with an admissibility issue that we will exclude from the present analysis, was sent a request for a preliminary ruling request with 2 questions: 

- Does Directive 2010/75, read in the light of Article 191 TFEU, must be interpreted as meaning that the Member States are required to impose a prior assessment of the effects of the activity of the installation concerned on the environment and on human health as an integral part of the procedures for granting or reconsidering a permit to operate such an installation under the directive ? 

- Must Directive 2010/75 be interpreted as meaning that, for the purposes of granting or reconsidering a permit to operate an installation under that directive, the competent authority must take into account, in addition to the polluting substances that are foreseeable having regard to the nature and type of industrial activity concerned, all those polluting substances which are the subject of emissions scientifically recognized as harmful which result from the activity of the installation concerned, including those generated by that activity which were not assessed during the initial authorisation procedure for that installation?

  

The CJEU preliminary rulings

The CJEU Grand Chamber rules that  the IED Directive « read in the light of Article 191 TFEU and Articles 35 and 37 of the Charter of Fundamental Rights of the European Union »   must be interpreted as meaning that:

- Member States are required to provide that the prior assessment of the effects of the activity of the installation concerned on the environment and on human health must be an integral part of the procedures for granting or reconsidering a permit to operate such an installation under that directive;

-  for the purposes of granting or reconsidering a permit to operate an installation under that directive, the competent authority must take into account, in addition to the polluting substances that are foreseeable having regard to the nature and type of industrial activity concerned, all those polluting substances which are the subject of emissions scientifically recognised as harmful which are liable to be emitted from the installation concerned, including those generated by that activity which were not assessed during the initial authorisation procedure for that installation;

- it precludes national legislation under which the period granted to the operator of an installation to comply with the measures for the protection of the environment and human health provided for in the permit to operate that installation has been repeatedly extended, whereas serious and significant risks to the integrity of the environment and human health have been identified. Where the activity of the installation concerned presents such risks, [...] in any event, that the operation of that installation be suspended.

 

III) Analysis

If the Ilva Grand Chamber judgment condemns specific regimes such as the one tailor-made for the case’s steelworks activities, it nevertheless extends in a pretorian way, the field of the IED.

The Luxembourg Court does not only states that environmental impact assessments are an “integral part of the procedures” of granting or re-considering permits for IED’s facilities, but also extends the frames of the these assessments by including “polluting substances which are the subject of emissions scientifically recognized as harmful which are liable to be emitted from the installation concerned” and not only foreseeable ones. 

This extension is motivated by the protection of health and environmental, in accordance with Articles 35 and 37 of the Charter of Fundamental Rights of the European Union; but it might put a burden on national EIA authorities.

If the hazards of polluting substances can be determined especially in regard to relevant ban-conventions or EU Law (ex the 2001 Stockholm Convention on Persistent Organic Pollutants, enforced in EU law by Regulation (EU) 2019/1021 of the European Parliament and of the Council of 20 June 2019 on persistent organic pollutants (recast)), the presence of such polluting substances on a designated industrial site as well the impact of this presence on human health, might be a scientific and legal challenge.

So as EIA authorities are now required to examine substances “which are liable to be emitted”, it would expand the weight and the complexity of EIA documents. 

Meanwhile, treaties such as the Aarhus Convention on access to information, public participation in decision‐making and access to justice in environmental matters require “environmental information [to be] available to the public [...] transparent and […] effectively accessible” (Article 5§2 of the Aarhus Convention). Conciliating the right to environmental information with the complexity of the matter is a conundrum, as even lawyers and judges are “unable to, on their own,  to assess and weigh complex scientific evidence” in environmental matters (cf. Point 4 of the Joint dissenting opinion of Judges AL-KHASAWNEH and SIMMA  under the 2010 ICJ “Pulp Mills on the River Uruguay” judgment).

The Italian authorities, by organizing an ad hoc legal regime for the Ilva factories, have also contributed to create this legal, political and scientific muddle, even if it was in order to keep jobs in an economically stricken area.

How would it be possible for the common man, the one the Clapham omnibus, to deal with such information in a “transparent” and “effectively accessible” manner? Especially if this man suffers from pollution-induced conditions.

The “Ilva” case is, according to a French ecologist newspaper, “an ecological monster [or] […] an ecological bomb”, dealt twice by the Strasbourg Court and now by the CJEU Grand Chamber. 

Would it be sufficient to avoid further pollution? Probably not.

Would it be enough to relieve the victims of such pollution? Certainly not. 

However, with the “Ilva” judgment, the CJEU gives an example of the way IED’s provisions have to be conciliated with the EU Charter of Fundamental Rights.

Such conciliation between Human Rights law and Environmental law was previously established by the ECHR’s Grand Chamber “Klima v Switzerland” judgment (in the field of climate change) and the CJEU cannot not ignore such conciliation anymore due to the authority it grants to its Strasbourg counterpart.

 

The Ilva judgment, a step closer in Strasbourg-Luxembourg dialogue?

 

Indeed, since 1970 and the CJEU “Nold” judgment, the Court recognizes that “international treaties for the protection of human rights on which the Member States have collaborated or of which they are signatories, can supply guidelines”, and chiefly the European Convention of Human Rights.

If the “principle of equivalence” in protection of human rights between the ECHR and EU legal systems was recognized by Strasbourg judges (in cases “Bosphorus Airways v Ireland” and “Avotins v Latvia”), the CJEU was more reluctant to follow its Strasbourg counterpart, wanting to preserve its authority over EU Law interpretation (cf. the CJEU Full Court Opinion 2/13 of 2014). 

However, in the present case, the Luxembourg Court takes into consideration the previous cases by the Strasbourg Court rendered on the “Ilva” issue. 

Might this consideration be a paving stone to the road leading to a EU membership of the European Convention of Human rights? Maybe. 

But one has to never forget that is road is not a “yellow brick road” any more, as some of its cobbles are now tainted by the “Ilva” steelworks’ polluting substances, and dampened by the tears of the victims.

Access to documents: an important victory for transparency in ClientEarth v Council

 

Dimitrios Kyriazis (DPhil, Oxon), Assistant Professor in EU Law at the Law School of the Aristotle University of Thessaloniki.

Photo credit: Bela Geletneky, via Wikimedia Commons

 

In ClientEarth v Council (Joined Cases T-682/21 and T-683/21), the General Court (GC) heard an action for annulment brought by ClientEarth AISBL (and Ms Leino-Sandberg) against a decision by the Council of the EU refusing access to certain documents requested on the basis of the Public Access to Documents Regulation (1049/2001) and the Aarhus Convention Regulation (1367/2006). The GC found against the Council and annulled its decisions refusing access.

This judgment is important for a variety of reasons. First, it sheds light on the proper application of transparency requirements for EU institutions. Second, it does not allow the EU’s legislative process to remain opaque. Third, it reaffirms the correct standards for providing sufficient justifications to EU decisions.

In this post, the background to the dispute is initially set out, as well as the pleas in law raised. Then, the GC’s key dicta are analysed. Finally, the post concludes with an assessment of the ruling’s broader ramifications. 

Background to the dispute and pleas raised

Lodging actions for annulment under Article 263 TFEU, the applicants, ClientEarth AISBL and Ms Päivi Leino-Sandberg, sought annulment of the decisions contained in the letters with reference numbers SGS 21/2869 and SGS 21/2870 of the Council of 9 August 2021, refusing them access in part to document 8721/21. This document was issued by the Council’s legal service and contained its legal opinion on the then proposed amendment of the EU Aarhus Regulation.

To provide some context, Regulation (EC) No 1367/2006 (“Aarhus Regulation”) was adopted by the EU in late 2006 in order to comply with the requirements of the Aarhus Convention, i.e. the Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters.

In March 2017, the Aarhus Convention Compliance Committee (‘the Aarhus Committee’), which was set up in order to verify compliance by the parties to that convention with the obligations arising therefrom, found, inter alia, that the EU was not in compliance with Article 9(3) and (4) of that convention regarding access to justice by members of the public and recommended that the EU Aarhus Regulation be amended. Its two main concerns were as follows. First, the Aarhus Regulation should not be restricted to acts of individual scope with legally binding and external effects adopted under environmental law, but that it had to be extended to all acts running counter to environmental law. Second, the mechanism should not be open only to certain NGOs entitled to make use of it, but must also be open to ‘members of the public’.

In October 2020, the European Commission published a proposal to amend the Aarhus Regulation, and the Aarhus Committee issued advice on the Commission’s proposal stating that, notwithstanding certain concerns that remained to be addressed, the proposal constituted a ‘significant positive development’. In May 2021, the Council’s legal service issued an opinion relating to the Commission’s proposal and the advice of the Aarhus Committee in document 8721/21. This is the document Client Earth requested full access to a few days later. The Council only partly granted their request, giving them access to only certain paragraphs of the document. Client Earth then made confirmatory applications pursuant to Article 7(2) of Regulation No 1049/2001 and in August 2021, the Council adopted the (now challenged) decisions, by which it determined the applicants’ confirmatory applications. While confirming its previous decision to refuse full access to the requested document, the Council granted additional partial access to some more paragraphs of that document.

The applicants brought an action for annulment against said Council decisions refusing them full access. In support of its action, ClientEarth relied on four pleas in law, under which the Council committed several errors of law and a manifest error of assessment.

The first three pleas were based formally on errors of law, while the fourth one was subsidiary in nature. We will follow the order which the GC followed in its judgment, thus examining the second plea first, then the first one, and finally the third one. Only the key legal dicta are repeated and analysed.

Second plea in law (paras 26-87)

The applicants’ second plea in law alleged that the Council committed an error of law and of assessment in applying the exception provided for in the second indent of Article 4(2) of Regulation No 1049/2001 relating to the protection of legal advice. In summary, this provision provides that access to a document is to be refused where disclosure would undermine the protection of legal advice, unless there is an overriding public interest in disclosure of that document. A three-step test has been set out in settled case law in order to apply this exception.

First, the institution concerned, here the Council, must satisfy itself that the document which it is asked to disclose does indeed relate to legal advice and, if so, it must decide which parts of it are actually concerned and may, therefore, be covered by the exception at issue. Second, the institution must examine whether disclosure of the parts of the document in question which have been identified as relating to legal advice would undermine the protection which must be afforded to that advice. The question to be asked here is whether it would be harmful to the institution’s interest in seeking legal advice and receiving frank, objective and comprehensive advice. The risk of that interest being undermined must, in order to be capable of being relied on, be reasonably foreseeable and not purely hypothetical. Finally, even if said institution considers that disclosure of a document would undermine the protection of legal advice, it is incumbent on it to ascertain whether there is any overriding public interest justifying disclosure despite the fact that its interest in seeking legal advice and receiving frank, objective and comprehensive advice would thereby be undermined.

These conditions were examined in turn. The applicants disputed whether the opinion contained legal advice to begin with, but their argument was  swiftly (and rightly) rejected by the GC, which stressed that ‘the analysis of the requested document shows that its content is intended to answer questions of law and, as a result, is covered by the exception relating to the protection of legal advice’ (para 42).

Moving on to the second condition, the applicants had asserted that  the document was not particularly sensitive and did not have a particularly wide scope, so that the Council erred in assessing that its disclosure was liable to undermine the protection that must be afforded to legal advice. More specifically, they submitted that the Council did not establish that there was an actual, specific, reasonably foreseeable and non-hypothetical risk that would result from disclosure of that document, and did also not establish that the document had a particularly wide scope having regard to the legislative context in which it was adopted.

Regarding the sensitive nature of the requested document, the Council had substantiated it by relying on three considerations. The first consideration was the context in which that document had been drawn up and its content; the second was the risk of external pressure if the document was released; and the third, the fact that the issues addressed could be the subject of litigation before the EU Courts.

The GC very systematically and methodically tore down these defences. First, it stressed that the document itself must be particularly sensitive in nature, not, as argued by the Council, the context of which it forms part (para 58). If it comprises only legal assessments that have no originality and does not contain, in addition to those assessments, sensitive information or does not refer to confidential facts, it cannot be considered sensitive in nature (para 59). The Council’s position on this matter was not endorsed by the GC.

The Court next focused on the Council’s assertion that the disclosure of the requested document would expose its legal service to external pressure which could subsequently affect how its advice is drafted and therefore prejudice the possibility of that legal service of expressing its views free from that pressure. The GC was not receptive to such abstract “dangers” either. First, it reiterated settled case law stressing that openness in the legislative process of the EU institutions contributes to conferring greater legitimacy on the institutions in the eyes of EU citizens and increasing their confidence in those institutions by allowing divergences between various points of view to be openly debated (para 64). Therefore, mere statements relying, in a general and abstract way, on the risk of ‘external pressure’ did not suffice to establish that the protection of legal advice would be undermined. This argument was, accordingly, also rejected by the GC.

As regards the Council’s argument that the requested document was particularly sensitive in so far as the issues addressed could be the subject of litigation before the EU Courts, the GC was not particularly sympathetic here either. In essence, the nub of the Council’s argument here was that it would be difficult for the legal service of an institution which had initially expressed a negative opinion regarding a draft legislative act subsequently to defend the lawfulness of that act before the EU Courts, if its opinion had been published. This, prima facie at least, does make sense. However, the GC reminded the Council that it is settled case law that such an argument was too general an argument to justify an exception to the openness provided for by Regulation No 1049/2001 (para 74). More specifically, the Council had not specified exactly how disclosure of the requested document could harm its ability to defend itself in the event of litigation concerning the interpretation or application of the Aarhus Regulation. Furthermore, it was not apparent from the examination of the content of that document that it could be regarded as expressing a negative opinion regarding the Commission’s proposal for amendment of that regulation. Concluding on this matter, the GC stressed (para 76) that the Council’s refusal was vitiated by an error of assessment and, consequently, the first complaint had to be upheld.

The GC then moved on to the second complaint of the applicants, which alleged that, contrary to what the Council had claimed, the scope of the requested document was not particularly wide. The arguments of the Council were twofold. One, the Commission’s proposal entailed the broadening of the scope of the internal review mechanism provided for by the Aarhus Regulation to acts of general application which run counter to environmental law, but the preexisting limitations were based on the similar limitations of standing under Article 263 TFEU. Therefore, in the Council’s view, the analysis contained in the requested document entailed implications which allegedly went beyond the legislative process in question. Two, the Council maintained that the requested document touched upon issues that could affect the Commission’s choices regarding future legislative proposals in the context of the ‘European Green Deal’, which was being drawn up at that time.

The Council was, once again, rapped over the knuckles by the GC, with the latter asserting that the Council did ‘no more than rely on the possible impact of the requested document in relation to future legislative proposals of the Commission in environmental matters, while the Commission’s proposal for amendment of the Aarhus Regulation [was] restricted to those matters alone’ (para 82). Moreover, the GC (very logically) dismanted the argument relating to an analogy with Article 263 TFEU, stating that the Council had not proven that the Commission’s proposal on the Aarhus Regulation entailed consequences on the conditions for the admissibility of actions for annulment brought by legal or natural persons, which are provided for by Article 263 TFEU and cannot be amended other than by revision of the Treaties (para 84). The second complaint was, thus, also upheld, and the applicant’s second plea in law was upheld in its entirety (para 87). The GC then went on to briefly examine their first plea in law.

First plea in law (paras 88-103)

The applicants’ first plea in law alleged that the Council committed an error of law and of assessment in applying the exception provided for in Article 4(3) of Regulation No 1049/2001 relating to the protection of the decision-making process. Under the first subparagraph of Article 4(3) of Regulation No 1049/2001, access to a document, drawn up by an institution for internal use, which relates to a matter where the decision has not been taken by the institution, is to be refused if disclosure of the document would seriously undermine the institution’s decision-making process, unless there is an overriding public interest in disclosure.

The applicants argued that, since on the date on which the contested decisions were adopted, the Council had already adopted its position on the Commission’s proposal and, moreover, the provisional agreement had already been concluded, there was no longer an ongoing decision-making process which disclosure of the requested document could have seriously undermined.

The GC reminded both parties of the ratio underpinning the relevant provision of Regulation No 1049/2001: it is intended to ensure that those institutions are able to enjoy a space for deliberation in order to be able to decide as to the policy choices to be made and the potential proposals to be submitted (para 93). However, said provision may no longer be relied on in respect of a procedure closed on the date on which the request for access was made (para 96). In practice, as the GC very pragmatically observed, agreements reached in the course of trilogues are subsequently adopted by the co-legislators without substantial amendment. This meant that it was appropriate to consider that the decision-making process of which the adoption of the requested document formed part was closed at the date on which the Council approved the provisional agreement (para 99). Therefore, the Couuncil’s reliance on this provision of the Regulation in order to refuse disclosure was also vitiated by an error of law (par 101).

Third plea in law (paras 104-120)

The applicants’ third plea in law, i.e. the final plea examined by the GC, alleged that the Council committed an error of law and a manifest error of assessment in applying the exception provided for in the third indent of Article 4(1)(a) of Regulation No 1049/2001 relating to the protection of the public interest as regards international relations (for this point in particular, see this excellent piece by Peter and Ankersmit). The applicants submitted that there was no risk that international relations would be undermined and that the exception based on the protection of international relations was inapplicable, given that the requested document is purely legal in nature.

The Council, to justify the application of the exception relating to the protection of international relations within the meaning of the third indent of Article 4(1)(a) of Regulation No 1049/2001, had argued that the full disclosure of the requested document would amount to revealing considerations relating to the ‘legal feasibility of solutions that the European Union could implement to address the alleged non-compliance with the Aarhus Convention’. The Council also stressed that the risk that the public interest would be undermined as far as international relations were concerned was reasonably foreseeable and not purely hypothetical, in so far as the question whether the Aarhus Regulation complied with the Aarhus Convention was to be examined during an upcoming meeting of the parties concerned in 2021. Thus, the requested documents could be used by other parties to the Aarhus Convention during discussions during the meeting of the parties, which could weaken the position that the European Union might have intended to take in that institutional context.

The GC’s strict approach to such assertions will by now be familiar to the reader. The GC noted (para 112) that the existence of a mere link between the elements contained in a document (which is the subject of an application for access) and the objectives pursued by the European Union in the negotiation and implementation of an international agreement is not sufficient to establish that disclosure of those elements would undermine the public interest protected as regards international relations. Even more crucially, the GC noted, the adoption of an act of secondary EU legislation necessarily implies legal analyses from each institution participating in the legislative procedure, which entails a risk of divergences of legal assessment or interpretation. But this is an integral part of any legislative procedure and such divergences are therefore liable to be explained to non-member countries or international organisations in an international body such as the meeting of the parties to the Aarhus Convention, without necessarily weakening the European Union’s position resulting from the final version of the act ultimately adopted (para 114). Consequently, the Council failed to provide sufficient explanations as to the specific, actual, reasonably foreseeable and non-hypothetical risk on which it relied regarding the international relations of the European Union and the other parties to the Aarhus Convention (para 118).

The applicants’ fourth plea in law, raised in the alternative, alleged infringement of Article 4(6) of Regulation No 1049/2001, in that the Council had failed to grant the applicant wider access to the requested document. This plea was not even examined by the GC, since it had already found that the decisions had to be annulled, without there there being any need to examine the (subsidiary) fourth plea (para 120).

Broader Ramifications and Conclusion

This very detailed and well-substantiated ruling by the GC is significant for a number of reasons. Firstly, it sheds light on the exact conditions that need to be fulfilled for access to documents to be validly refused. Secondly, it reiterates, and clarifies, that any “risk” on which an EU institution might wish to rely to refuse disclosure has to be specific, actual, reasonably foreseeable and non-hypothetical. Thirdly, it demonstrates the pragmatic way in which the EU Courts understand the everyday reality of EU rulemaking.

Most importantly, the ruling is important as a matter of principle. Even when the political stakes are high, EU Courts will side with transparency. The quote “sunlight is said to be the best of disinfectants” by Brandeis echoes in Luxembourg just as it did before the US Supreme Court.

 

REPowerEU: a European fiscal space beyond the pandemic

 

Rosalba Famà, PhD student in EU law, Bocconi University

 

Photo credit: ThibaultC, via wikicommons media

 

The European Union is in the process of adopting a new initiative named REPowerEU to manage the current energy crisis which followed the Russian invasion of Ukraine. On May 2022, the Commission presented a comprehensive REPowerEU strategy which includes a proposal to amend Directives on the promotion of the use of energy from renewable sources, on energy performance of buildings and energy efficiency, as well as an ambitious industrial policy program which aims to break free from all energy dependency. Only the latter will be the object of the current analysis and I will refer to it as the REPowerEU plan. This programme is designed to boost reforms and investments dedicated to diversifying energy supplies and will be embedded in the legal architecture of Next Generation EU (NGEU), which is the European plan for the economic recovery after the Covid-19 pandemic. This blogpost, after depicting the geopolitical context of the adoption of REpowerEU, will explain its objectives, its legal structure and its functioning. It will then conclude that NGEU represents a blueprint for further European initiatives which involve common spending in times of emergency.   

         

As it is well known, in order to tackle the economic consequences of the pandemic, the EU adopted the NGEU plan which consists of taking up common debt of up to 750 billion euro to distribute funds amongst the requesting Member States. The distribution is in the form of loans and grants based on a formula that favors countries most affected by Covid-19 (see Art 12 of Reg 2021/241 establishing the Recovery and Resilience Facility). This unprecedented and ambitious plan has allowed the EU to avoid a serious economic recession caused by the consequences of the lockdowns. Since then, another unexpected geopolitical event occurred being the Russian invasion of Ukraine.    

  

Before the outbreak of the conflict in Ukraine, EU Member States relied extensively on Russian energy imports which provided gas and oil, both for industrial and household use. Accordingly, the Russian energy supply played a crucial role within the European economy. It became self-evident that the EU’s dependence on Russian oil and gas markets represents a threat for the continuation of the EU’s economic recovery following the pandemic and makes an enfranchisement strategy indispensable. Therefore, with the Versailles Declaration of 10 and 11 March 2022, the Heads of States and Governments of the EU agreed on the need for a plan to phase out the dependency on Russian fossil fuel imports.

 

This ambitious objective requires massive investment in strategic energy infrastructure having an estimated cost of up to 210 billion euro. As such, the EU is confronted with the need to provide additional large amounts of funding to cover the cost of these new investments. The Recovery and Resilience Facility (RRF), the temporary fiscal capacity dedicated to the pandemic introduced with NGEU, is regarded as a “well-suited” instrument to contribute to the Union’s response to these new challenges. To foster the independence and security of the Union’s energy supply, REpowerEU will channel additional funds to the RRF and allocate these amounts to the Member States to modernize the EU energy infrastructure.

 

Moving to the legal structure of REpowerEU, the plan will have the form of a Regulation of the Council and the European Parliament which amends Regulation (EU) 2021/241 establishing the Recovery and Resilience Facility (RRF). REPowerEU introduces within the framework of NGEU, an additional chapter of reforms and investments, dedicated to diversifying energy supplies and increasing energy efficiency of the Member States. REPowerEU also amends Regulation (EU) 2021/1060 which lays down Common provisions on European funds, Regulation (EU) 2021/2115 that regulates the European Agricultural Guarantee Fund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD), Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, and Decision (EU) 2015/1814 on the Market Stability Reserve for the Union greenhouse gas. Amending certain provisions concerning European funds is crucial to channel additional resources to a new “basket” of the RRF, which will be specifically dedicated to finance energy related targets also called “REPowerEU objectives”.

 

The legal basis for the RRF is Article 175 (3) TFEU, a provision falling within the scope of the cohesion policy that allows the establishment of specific actions outside pre-existing funds when they are proved to be necessary. This provision is drafted in very broad terms and actions to be adopted only need to comply with a necessity test. The general objective of the RRF stated in Article 4 of Regulation (EU) 2021/241 is to promote the Union’s economic, social and territorial cohesion by mitigating the social and economic consequences of the Covid-19 crisis. REPowerEU amendments aim at increasing the resilience of the Union energy system in two ways, on the one hand through a decrease of dependence on fossil fuels and, on the other hand, through a diversification of energy supplies at Union level.  

 

At the heart of the REpowerEU implementation is the pooling of pre-existing European resources for new energy related targets and milestones, such as improving energy facilities to meet immediate security of supply needs, boosting energy efficiency in buildings and critical energy infrastructure, increasing the production of renewable energy, addressing internal and cross-border energy transmission bottlenecks and supporting zero-emission transport. To accompany those changes, the workforce must also be requalified towards green skills. The provisional agreement on the Commission proposal reached between the European Parliament and the Council in December 2022 set up that at least 30% of resources distributed under REPowerEU must be allocated to measures having a cross-border or multi-country dimension or effect. Moreover, the co-legislators agreed on establishing measures to tackle energy poverty and to support vulnerable households, SMEs and micro-enterprises particularly affected by energy price increases.   

 

The REPowerEU objectives will be financed in three different ways. Firstly, by revenues coming from the Emission Trading System; secondly by redirecting unspent NGEU’s loans; and thirdly by channeling pre-allocated resources from shared management programmes. As to the new revenue, additional grants of up to 20 billion Euro will be made available. This amount comes from the auctioning of the Emission Trading System allowances. The amendments to Directive 2003/87/EC authorize the auctioning of the allowances for the period until 31 December 2026 and until the total amount of revenue has reached 20 billion Euro. This revenue will be available to the Recovery and Resilience Facility. Resources from the ETS, disbursed in the form of non-repayable support, represent an example of solidarity and economic redistribution within the EU that favors Member States most negatively affected by the energy crisis. To this purpose, the distribution criteria will consider their energy dependency rate and the share of fossil fuels in gross inland energy consumption.

 

As to the REPowerEU loans’ component, REPowerEU will allow the allocation of unspent NGEU’s loans to the new REPowerEU objectives. As known to date, not all 27 Member States requested NGEU’s loans within their National Recovery and Resilience Plans. For example, Germany’s recovery plan foresees only the request for grants. Notwithstanding, according to Article 14 of the Regulation establishing the RRF, those Member States may ask for support in the form of loans until August 2023. Indeed, those States have access to finance in the financial markets at very low interest rates because of their high credit ratings. As it is self-evident, they have no appetite for this type of financial support, which is provided by the EU only upon the achievement of ambitious targets and milestones set in the National Recovery and Resilience Plan. This explains why there are currently unspent loans within NGEU. Therefore, REPowerEU aims to mobilize these resources to those Member States that have the need due to their lower financial ratings. To this aim, Member States will have a limited period of time after the entering into force of REPowerEU to communicate to the Commission whether they intend to request additional loan support. Afterwards, the Commission must present an overview of the willingness expressed by the Member States and propose a plan for the distribution of the available resources.

 

The REPowerEU objectives will also be financed by a percentage of resources coming from other funds established by the Union standard budget, i.e. non NGEU-related. In other words, the REPowerEU will allow the redirection of pre-allocated funds to support new energy targets. This third way of financing the REPowerEU objectives is very innovative as it allows Member States to request to transfer resources under shared management programmes to the RRF. Those transfers consist in up to 12.5% of the national allocation under the Common Provisions Regulation (EU) 2021/1060, up to 12.5% of the national allocation under the European Agricultural Fund for Social Development. The Council has proposed the transfer to the RRF of all or part of a provisional allocation from the Brexit Adjustment Reserve. In this way, requesting Member States can pool European resources already allocated to them under different European spending programmes towards energy related targets. This exercise requires strategically orienting public expenditure in times of emergency.

 

The procedure for approving revised Recovery and Resilience Plans comprises different stages. First, Member States willing to receive additional funding to reach REpowerEU objectives are requested to submit an updated version of their National Recovery and Resilience Plan including a new REpowerEU chapter. Within the framework of the 2022 Country Specific Recommendations, the Commission has indicated actions needed to face the current energy crisis per each Member State. Any Recovery and Resilience Plan which includes a REPowerEU chapter must indicate reforms and investments energy related to be funded by the RRF, with corresponding new milestones and targets in compliance with the Country Specific Recommendations. It may also contain the scale-up of reforms and investments adopted in the previous version of the Recovery and Resilience Plan. Second, the Commission assesses the plans considering whether proposed reforms and investments are capable of contributing towards the diversification of Union’s energy supply and reduction of dependence on fossil fuels before 2030. Third, in the event of a positive assessment on a proposal from the Commission, the Council approves the Recovery and Resilience Plan by means of an implementing decision setting out reforms and investments to be enforced by the Member States and the financial contribution (see Article 19 of Reg 2021/241).

Although NGEU was built as a one-off operation, the current energy crisis is showing that it is flexible enough to accommodate new emerging needs. In particular, the RRF being based on an ordinary cohesion legal basis seems capable to survive well beyond the pandemic. As long as economic resources are channeled to the RRF, this new facility can accelerate investments and address common strategic objectives. The adoption of a plan such as REPowerEU proves that NGEU is a blueprint for further action as the functioning of the RRF is capable to be used again and again. It also shows the necessity for the EU to equip itself with tools to quickly react to unexpected shocks. It remains to be seen if NGEU will account to a mere temporary fiscal space, confined to Covid-19 and the current energy crisis, or rather a much needed permanent one to boost common strategic investments beyond the pandemic.

No Pain, No Gain? Implementing the European Green Deal and Getting the EU Maritime Transport Sector “Fit for 55”

 

Killian O’Brien, DAAD Lecturer (Fachlektor), University College London

The EU has set a target of reducing its greenhouse gas emissions by 2030 by at least 55% compared to 1990 levels. This is to be achieved as part of the European Green Deal. With a somewhat unfavourable title reminiscent of a middle-aged sport group, the European Commission rolled out its much-anticipated “Fit for 55” legislative package on 14th July 2021. This bundle of legislative measures aims to secure rapid decarbonisation of the EU economy by transforming the bloc's emissions trajectory and bringing EU policies and legislation in 12 different areas into step. Given the significant impact of the transport sector in contributing to the EU’s overall emissions balance (ca. 25% of total emissions) and that emissions from this sector have been rising in recent years, it is unsurprising that many of the proposals are directed toward transport emissions. Given the sheer breadth and volume of proposals tabled, it is difficult to engage in a thorough analysis so soon, yet this short blog aims to outline some aspect of the proposed measures as they relate specifically to the maritime transport sector.

Four of the 10 proposals announced on 14th July address the maritime transport sector specifically, three being applicable to shipping and the fourth to certain ports within the European Economic Area. The three proposals related to shipping address establishing a revised system for greenhouse gas emission allowance trading (EU ETS proposal, COM(2021) 551 final), the use of renewable and low-carbon fuels in maritime transport (Fuel EU Maritime, COM(2021) 562 final) as well as a proposal restructuring the Union framework for the taxation of energy products and electricity (Energy Taxation Directive, COM(2021) 563 final). The proposed Regulation affecting ports deals with the deployment of alternative fuels infrastructure (AFIR, COM(2021) 559 final).

Arguably, the most significant proposal is for a revised Emissions Trading System Directive (EU ETS), which would include international shipping within the EU ETS framework. Under the broader applicable international legal framework (UNFCCC, UNCLOS, MARPOL etc), shipping, which is not regulated under the Paris Climate Agreement, falls under the auspices of the UN’s International Maritime Organisation (IMO). Despite having a broad mandate to regulate marine pollution, including GHGs (Article 2, IMO Convention), progress within this designated global regulator has been at times so painfully slow that the EU has now decided to take the step towards unilateral regulation and bring shipping within the EU ETS framework. Indeed, the European Commission notes at page 5 of the explanatory memorandum to the revised EU ETS proposal that “[IMO] measures are insufficient to decarbonise international shipping in line with international climate objectives”. This is not particularly novel as the EU has previously taken the lead in unilaterally lowering the sulphur content of marine fuels following a lack of progress at IMO and legally there is no obstacle to this kind of action. UNCLOS permits States to take action to “establish particular requirements for the prevention, reduction and control of pollution of the marine environment as a condition for the entry of foreign vessels into their ports or internal waters” (Art. 211 (3) UNCLOS). Indeed, broader principles of jurisdiction in public international law allow for such unilateral measures where a substantial nexus to the matter in question can be demonstrated. The significant effects of GHGs on the environment and on individuals’ health would seem to satisfy this jurisdictional criterion and the EU is therefore entitled to push forward with the creation of unilateral market-based measures in the form of ETS. Having said that, when considered from a trade policy point of view, there is some merit to calls for the EU to continue to work towards a global solution due to the threat of loss of competitiveness as well as the potential for harmful regime fragmentation and increased costly administrative burden for shipping companies and others due to, for example, multiple monitoring and reporting standards. To that end, the EU ETS Directive proposal contains a review clause to assess progress at IMO (Article 3ge).

Under the EU ETS scheme, companies buy allowances based on one allowance being equal to 1 tonne of CO2 emitted. The proposal makes it clear that shipping companies (or the party made responsible for the emissions) will not be entitled to any free allowances. Sufficient allowances must be surrenders to cover the emissions for the year. Allowances can be bought and sold as commodities so that (environmentally friendly) companies with more allowances than they need can sell them to others or keep the unused allowances in reserve. The scheme will apply to vessels of 5,000 gross tonnes and above. The applicability of the EU ETS Directive proposal rationae loci relates to emissions from all voyages between ports in the European Economic Area (EEA) and at berth in EEA, i.e. intra-EEA voyages. In addition, extra-EEA voyages, whether inbound or outbound also fall under the scope of the EU ETS proposal, albeit only 50% of the respective inbound and outbound emissions. The considerable impetus with which the European Commission is proceeding is evident in the fact that emission allowances will already have to be purchased from 2023. However, a graduated introduction of allowances is foreseen, starting with 20% of emissions in 2023, rising to 45% in 2024, 70% in 2025 and then to full 100% emission coverage for 2026. Sanctions are foreseen with fines of €100 per tonne CO2 and repeat offenders who have been non-compliant in consecutive years could even be denied entry to EU ports.

The other most significant element within this legislative package can be seen in the imposition of the first greenhouse gas intensity requirements on shipping fuels by way of the Fuel EU Maritime proposal. This proposed Regulation stipulates a limit on the GHG intensity of energy used on-board by a ship arriving at, staying within or departing from ports under the jurisdiction of a Member State (Art. 1). Ship fuels used by these ships must improve their GHG intensity by a prescribed percentage compared to a 2020 baseline (Art. 4). Once again, a graduated approach is envisaged, with ever-more stringent improvements required every 5 years until 2050. This proposed legislation will also apply to vessels of 5,000 gross tonnes and above.

The Fuel EU Maritime proposal could lead to a considerable proportion of the energy used by ships calling at EU ports being LNG and biofuels by 2035. Two primary concerns are pertinent in this respect, namely calculations suggesting that LNG, itself a fossil fuel, in fact offers minimal emissions reductions as well as releasing methane unburned during the energy conversion (combustion) process, and that many biofuels are suspected of having less than proven sustainability criteria, depending in particular on where they are produced. In addition, the requirement that shipping companies source adequate fuels, even when the ship is outside the EU, could be particularly burdensome to the point that it is excessive or disproportionate.

A significant development contained in the EU ETS and Fuel EU Maritime proposals is the strengthened recognition of the polluter pays principle in the sector. Typically, shipping companies could have been assumed to be responsible for emissions caused and the GHG intensity of a particular vessel. However, in what would appear to be a late inclusion in the draft proposals, the EU ETS and Fuel EU Maritime proposals include provisions recognising the role of the commercial operator. Under this regime, the shipping company would be permitted to make commercial operators, i.e. charterers who determine the choice of fuel, route and speed of the ship, responsible for costs of compliance with the two draft legislative proposals in question by way of an appropriate “commercial agreement”.

The third Fit for 55 legislative proposal aimed at the shipping industry (Energy Taxation Directive, ETD) relates to the taxation of energy products and discourages the use of fossil fuels by setting higher rates of taxation for fossil fuels and lower rates for renewables products thereby decreasing the relative price advantage of fossil fuels over less polluting alternatives. The material scope of the proposed ETD therefore imposes tax on bunker fuels sold in the EEA for voyages within the EEA, although Member States can choose to extend this to extra-EU voyages. As this is a piece of taxation rather than environmental legislation, unanimous approval in Council is required. It is therefore not unthinkable that certain Member States such as Cyprus, Greece and Malta, with their particular interest in the shipping industry, could block proposals or that proposals could be considerably amended to appease certain vested interests.

In respect of ports, the scope of the AFIR proposal is limited to those ports within the Trans-European Transport Network (TEN-T). Some 329 ports make up this network, which are determined on the basis of a set of quantitative thresholds. Hence, the largest ports in terms of freight volumes and passenger volumes are affected. These ports will be responsible for providing an “appropriate” LNG refuelling infrastructure as of 1.1.2025 (Art. 11) and must also provide a minimum shoreside electricity supply for containerships and passenger ships as of 1.1.2030 (Art. 9). The proposed Regulation contains mandatory national targets for the deployment of “sufficient alternative fuels infrastructure” in relation to vessels as well as road vehicles and stationary aircraft. Common technical mechanisms are foreseen (Art. 19), in addition to national policy frameworks (Art. 13) and robust reporting mechanisms (Art. 14). The European Commission’s choice of LNG as the preferred fuel-source is interesting in that full alignment between the Alternative Fuels Infrastructure proposal and Fuel EU Maritime proposal must be maintained throughout what could be a lengthy legislative process. This is illustrative of the inter-related nature of the various proposals. In any event, considering the aforementioned criticism of LNG, its largely recognised medium-term stop-gap character and the clear preference of some significant carriers for alternate fuel sources such as ammonia, it remains to be seen whether this proposal will have sufficient longevity to have the desired effect. Further discussions will almost certainly centre on avoiding carbon leakage, future proofing, clarifying the addressees of reporting obligations and, almost inevitably, the issue of funding for capital infrastructure investment projects.

Conclusion

This preliminary assessment has shown the generally far-reaching approach adopted by the European Commission with these proposals. The unilateral nature of EU action has been identified as legally acceptable but not entirely unproblematic from a political and trade policy point of view. At the same time, the EU has enjoyed success in driving the international regulatory agenda with a similar past strategy in relation to fuel sulphur-content limits and there is every reason to think that these measures could have the incidental effect of increasing the pace of negotiations at IMO. Of course, it goes without saying that all proposals will now be subjected to considerable scrutiny and negotiation within the Parliament and Council of the EU. It remains to be seen whether and with which measures the EU maritime transport sector can be whipped into shape to make it truly Fit for 55.

Photo credit: Łukasz Golowanow via Wikimedia commons

Barnard & Peers: chapter 22

The European Commission proposals on “Green” finance and the financial regulators’ initiatives on sustainability

Thomas Piticchio 

As green politics have gained greater public attention and support, investors who mandate financial intermediaries to take investment decisions on their behalf are calling for more sustainable products and greater transparency about how and where their money is invested. 

To accommodate investors’ request, financial intermediaries are offering financial products labelled as “green”.  These products are in the process of being regulated by the European Commission whose aim is to encourage capital flows towards sustainability and to provide investors with more clarity on what constitutes a sustainable investment.

In December 2018, the European Commission mandated a group of social, financial and academic experts to develop a strategy on sustainable finance which incorporates Environmental, Social and Governance (ESG) considerations into investment decisions and ensures that clients are accurately informed.

To implement the sustainable strategy, the European Commission adopted a package of proposed measures:

- Regulation on the establishment of a framework to facilitate sustainable investment (the “Taxonomy Regulation”)

- Regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341 (the “Disclosure Regulation”)

- Regulation amending the benchmark regulation (the “Low Carbon Benchmark Regulation”)

This article analyses each proposed Regulation, explains the proposed requirements for a product to be labelled and branded as “green” and the regulators’ initiatives towards sustainability.

The Taxonomy Regulation

The Taxonomy Regulation establishes uniform criteria to determine whether an economic activity is environmentally sustainable and can, therefore, be labelled as green.  When offering green funds, financial intermediaries must indicate the extent to which the criteria for environmentally sustainable economic activities were used.  This is to avoid raising capital for “green” purposes without clear benefits to the environment.

The Taxonomy Regulation applies to the Union, Member States and financial market participants.  Manager of UCITS, AIFs, EuVECA and EuSEF, insurers and pension products providers fall within the definition of financial market participants and are referred to in this article as participants. 

Environmentally sustainable investment

To be considered as environmentally sustainable, an investment must fund one or more economic activities which:

- contribute substantially to one or more of the environmental objectives
- do not significantly harm any of these objectives
- comply with the minimum safeguards and the technical screening criteria

The environmental objectives set out in the Taxonomy Regulation are climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, waste prevention and recycling, pollution prevention and control and protection of healthy ecosystems.

The above activities must comply with the criteria set out in Article 12 of the Taxonomy Regulation which determines whether an economic activity harms any of the environmental objectives significantly.

Minimum safeguards

The economic activities must be carried out respecting the minimum social and governance safeguards, being the principles and rights set out in the International Labour Organisation’s declaration on Fundamental Rights and Principles at Work.

This is to ensure that financial intermediaries do not neglect social factors while promoting environmentally sustainable products.

Technical screening criteria

The economic activities must comply with the technical screening criteria set out in Article 14 of the Taxonomy Regulation:

- identify the most relevant potential contributions to the given environmental objective, over the short and long-term impacts 

- specify the minimum requirements to avoid significant harm to other objectives 

- be qualitative or quantitative, or both, and contain thresholds where possible

- build upon Union labelling and certification schemes, methodologies for assessing environmental footprint, and EU statistical classification systems, and take into account any relevant existing EU legislation

- be based on conclusive scientific evidence, high quality research and market experience

- consider the life-cycle of an economy activity 

- take into account the nature and the scale of the economic activity 

- consider the potential impact on liquidity in the market, the risk of certain assets becoming stranded as a result of losing value due to the transition to a more sustainable economy, as well as the risk of creating inconsistent incentives

- cover all relevant economic activities within a specific sector and ensure that those activities are treated equally if they contribute equally towards one or more environmental objectives, to avoid distorting competition in the market

- be set so as to facilitate the verification of compliance with those criteria whenever possible

If the investment funds one or more of the environmental objectives without causing significant harm to any of them and complies with the minimum safeguards and technical screening criteria, that investment can be labelled as green and EU compliant.

It must be noted that the Taxonomy Regulation considers E (environmental) factors only.  Social and governance related investments are expected to be regulated through separate legislative proposals.

The Disclosure Regulation

While the Taxonomy Regulation establishes the framework to define an environmentally sustainable activity, the Disclosure Regulation sets out how managers must disclose certain information to provide greater clarity and transparency to investors.

Websites

Participants are required to publish policies on the integration of sustainability risks in their investment decision-making process on their websites and keep these policies up to date. 

The website must have:

- a description of the sustainable investment target
- information on the methodologies used to assess, measure and monitor the impact of the sustainable investments, including its data sources, screening criteria for the underlying assets and the relevant sustainability
- an index or target as appropriate
- the information included in the periodical reports (discussed below) 

The methodology used for calculation of indexes and benchmarks must be made readily available for investors. 

Pre-contractual disclosures

The following descriptions must be included in pre-contractual disclosures:

- the procedures and conditions applied for integrating sustainability risks in investment decisions

- the extent to which sustainability risks are expected to have a relevant impact on the returns of the financial products made available

- how the participants’ remuneration policies are consistent with the integration of sustainability risks and are in line, where relevant, with the sustainable investment target of the financial product

Financial products with an index

If a financial product has as its target sustainable investments or investments with similar characteristics and an index is designated as a reference benchmark, the information to be disclosed must be accompanied by the following:

- information on how the designated index is aligned with that target

- an explanation as to why the weighting and constituents of the designated index aligned with that target differ from a broad market index

Financial products with no index

If a financial product has as its target sustainable investments or investments with similar characteristics and no index is designated as a reference benchmark, the information must include an explanation of how that target is reached.

Periodical reports

Periodic reports (i.e. annual and/or interim) must include:

- the overall sustainability-related impact of the financial product by means of relevant sustainability indicators

- if an index is designated as a reference benchmark, a comparison between the overall impact of the financial product with the designated index and a broad market index in terms of weighting, constituents and sustainability indicators

The Low Carbon Benchmark Regulation

The Low Carbon Benchmark Regulation establishes a new category of benchmarks comprising low-carbon and positive carbon impact benchmarks, which provides investors with better information on the carbon footprint of their investments. 

A low-carbon benchmark is defined as a benchmark for which the underlying assets are selected to have fewer carbon emissions than the assets that comprise a standard capital-weighted benchmark.

A positive carbon impact benchmark, by comparison, is defined as a benchmark for which the underlying assets are selected on the basis that their carbon emissions savings exceed the asset's carbon footprint.

Recently, there has been an increase in ESG benchmarks.  The users of those benchmarks do not always have the necessary information on the extent to which the methodology used to establish the benchmark considers ESG objectives.  The Low Carbon Benchmark Regulation requires disclosure of how the methodology takes into account the ESG factors for each benchmark or family of benchmarks to enable investors to make well-informed choices.

Technical report on the Taxonomy

The European Commission mandated a technical expert group (TEG)  to develop a unified classification system known as a Taxonomy.

In June 2019, the TEG published a report containing technical screening criteria for 67 activities that can make a substantial contribution to climate change mitigation across the sectors of agriculture, forestry, manufacturing, energy, transportation, water and waste, ICT and buildings. 

The report also contains methodologies and worked examples for evaluating substantial contribution to climate change adaptation, guidance and case studies.

The TEG’s mandate was extended until the end of the year to refine and further develop some incomplete aspects of the proposed technical screening as well as issuing further guidance on the implementation and use of the Taxonomy.

While the TEG is working on finalising the criteria, in order to avoid disproportionate costs for participants, a number of provisions were put in place to ensure that the Taxonomy will only be used once it is stable and mature.  Each activity fund managers would like to invest in must be analysed carefully to ensure that it satisfies the criteria set out in the Taxonomy.

The financial regulators’ initiatives towards sustainability

While some countries are regularly monitoring the EU’s proposed regulations on green finance, others have already enacted domestic legislation to safeguard investors in green products.  This will be analysed alongside third countries’ initiatives like China and Hong Kong that are significantly contributing towards a greener economy.

EU Member States

France

France is the most active country when it comes to sustainability.  Article 173-VI of the Law on Energy Transition for Green Growth (LTECV) requires asset management companies and institutional investors to provide information on the social and environmental consequences of their activities.  This includes disclosing impact on climate change, social factors, the circular economy, the fight against food waste, discrimination and promoting diversity.  However, the “comply or explain” principle applies to Article 173-VI giving flexibility to asset management companies and institutional investors to providing valid reasons for the non-compliance (Article 173-VI: Understanding the French regulation on investor climate reporting).

In July 2019, the Autorité des Marchés Financiers (AMF), the financial regulator in France, established the AMF’s Climate and Sustainable Finance Commission made up of experts mandated to ensure collective progress in understanding the challenges around sustainability. 

The AMF is reviewing KIIDs and prospectuses of French authorised funds to ensure that the information provided by asset management companies on their investment strategy and climate-related risks is clear, accurate and not misleading.  The AMF’s supervisory power was reinforced by the law on Business Growth and Transformation (the “PACTE Law”).

United Kingdom

The Financial Conduct Authority (FCA), the financial regulator in the United Kingdom, issued a Discussion Paper (18/8) on Climate Change and Green Finance last month saying it will challenge firms which provide misleading information on their “green” activities to investors.  The FCA will take appropriate action (e.g. issuing further policy and guidance) to prevent consumers from being misled and to align UK rules with EU regulations.  

The UK’s exit from the EU should, in theory, not compromise the UK's compliance with the EU legislative proposals.  The Taxonomy Regulation, the Disclosure Regulation and the Low Carbon Benchmark Regulation were all listed in the Financial Services (Implementation of Legislation) Bill 2017-2019 as pending EU legislation to be onshored.  It is likely that these regulations will be onshored into UK law under the legislation relating to the UK’s withdrawal from the EU and for the purposes and duration of any transitional or implementation period. 

Italy

The Commissione Nazionale per le Società e la Borsa (CONSOB), the financial regulator in Italy, recently established a Steering Committee to regularly monitor EU proposals, studies, researches and analysis on sustainable finance.

As to the domestic legislation, the Regulation establishing the provisions for implementation of Legislative Decree no. 58 of February 24, 1998, on intermediaries (Decree 58) requires intermediaries to provide accurate information (i.e. objectives and characteristics, general criteria for selection, policies in exercising voting rights, income generated) on products and services defined as “ethical” or “socially responsible”.  That information must be made available on the firm's website and disclosed yearly. 

Non-EU Member States

China

In December 2017, the China Securities Regulatory Commission (CSRC) issued standards for the content and format of the information provided in the semi-annual and annual reports produced by listed companies.  These standards include requirements for companies to report on relevant ESG matters. The requirements are mandatory for key polluters and apply on a comply-or-explain basis for all other listed companies.  CSRC is expected to introduce requirements for all listed companies and bond issuers to disclose environmental risks associated with their operations by 2020 and the requirement will become mandatory for all listed companies by then.

It is important to note that China’s guidelines for establishing a green financial system encourage securities regulators to increase penalties for listed enterprises and bond issuers that falsify environmental information (Sustainable Stock Exchanges Initiative).

Hong Kong

The Securities and Futures Commission of Hong Kong (SFC) issued a circular applicable to SFC-authorized funds incorporating ESG factors into their investment objective or strategy.

Under this circular, offering documents of SFC-authorized funds must contain information (i.e. description of key investment focus, relevant green or ESG criteria or principles…) necessary for investors to make an informed judgement of whether or not to invest in these products.  The manager of a green fund must regularly monitor and evaluate the underlying investments to ensure their fund meets the investment objective and requirements set out in the SFC’s circular.

The SFC is also in the process of launching a central datable of green funds on a dedicated webpage on its website.  Only SFC-authorized green funds complying with the requirements set out in the SFC’s circular will be listed.  The webpage is expected to be launched by the end of this year.

Conclusions

An analysis of the European Commission proposals is required for managers who are or will be offering financial products branded as green.  These products will have to comply with the criteria set out in the Taxonomy Regulation and participants disclose clear and accurate information so that investors can make well-informed decisions.  The Taxonomy Regulation will apply to climate change mitigation and adaptation activities from 1 July 2020 and appropriate measures must be taken by financial intermediaries if their funds invest in one or both of these economic activities. 

The European Commission will permit EU Member States to enact domestic legislation on green products.  This may help countries establishing national frameworks to facilitate sustainable investments, for example, issuing a special tax regime for green funds. 

However, the International Organization of Securities Commissions (IOSCO) has identified some discrepancies amongst domestic legislation on sustainable finance and this may undermine investors’ confidence.  The European Securities and Markets Authority (ESMA) stresses that coordination should be sought between countries and sustainability promoted and implemented by global regulators.  Similar and consistent measures across different jurisdictions would encourage financial intermediaries to market their green funds across the world enhancing capital flows towards sustainability.  

The Taxonomy could be a viable solution for establishing a unified and consistent classification system across several jurisdictions.  However, more actions must be taken to enhance investors’ confidence.  The SFC’s dedicated webpage listing ESG compliant funds should be considered by other regulators as this might have a positive impact on investing in green funds.

The CSRC’s initiative to making these requirements mandatory and to penalise financial intermediaries who provide misleading information could also be considered by EU regulators.  If the EU requirements become mandatory and the EU introduces penalties to financial intermediaries for non-compliance, investors would be properly safeguarded.  This would discourage financial intermediaries from offering funds labelled as green which do not have clear benefits to the environment.

Further reading:

European commission, Green Finance: Overview.  Available at https://ec.europa.eu/info/business-economy-euro/banking-and-finance/green-finance_es.

FCA, Discussion Paper (18/8) on Climate Change and Green Finance.

Barnard & Peers: chapter 23

Photo credit: euractiv.com