Confused taxonomy

Neil Eisberg | Editor

Sustainability is very much at the top of most industry and governmental agendas. But the application of legislation to achieve a national goal of sustainability is as complicated as any other approach to meeting national goals, and further complicated by a nation’s particular position in the international world.

For the UK, the picture is also tangled up with the matter of Brexit.

Much is currently being talked about regarding the legacy of EU legislation that is still on the UK statute books. The original planned ‘bonfire’ of EU legislation following the UK’s departure from the European Union has now been deferred, much to the concern of many in the UK Parliament and beyond. The outcome of this reversal of government policy remains uncertain but in one area the UK Government has been consistent.

Despite this indecision over outstanding EU legislation, the UK has committed itself to following an EU lead over a new ‘green’ taxonomy, or system of classification. The Green Taxonomy is designed to provide clarity and consistency for investors in order for them to easily compare the environmental performance and impact of companies and investment funds to inform their financial decisions.

The European Commission has been working for some time on its proposals, since 2021, in fact. Importantly for the chemical industry, the discussion had included much debate concerning chemicals and their sustainability. And in the development of its proposals, the Commission has had the support of the European chemical sector.

Indeed, the chemical industry’s trade body, the European Chemical Industry Council (Cefic) has been a major party in the development of the necessary criteria. The reasoning was that the development of specific criteria would assist in determining those chemicals that were considered sustainable and thereby drive the substitution of less desirable substances.

Such was the support for the new taxonomy that Cefic Director General Marco Mensink had said: ‘The new generation of chemicals that are safe and sustainable by design is set to be a growth engine for Europe.’

However, it has now come to light that in the final proposals presented by the Commission in early May 2023, there is no mention of chemicals at all, except for a reference and an appendix that states that taxonomy-aligned activities and products cannot contain chemicals that meet the criteria for Substances of Very High Concern (SVHCs). It does not, however, mention chemical production, which would be an important part of the potential guide for potential investors.

So what does this mean for the UK, which had plans to follow the EU’s lead, and to a significant extent, mirror the EU structure?

The UK Government had already set up an independent expert group, the Green Technical Advisory Group (GTAG) to provide non-binding advice on the design, and implementation of a UK Green Taxonomy. It was intended that the taxonomy should be ‘implemented and built to deliver the needs of UK business and investors’ and ‘robust enough to support the UK’s net-zero commitment’.

The taxonomy would also be designed to improve understanding of companies’ environmental impacts through taxonomy-aligned disclosures, through, for example, proposed Sustainability Disclosure Requirements (SDRs).

To satisfy the proposed criteria, an activity would have to meet three tests: make a substantial contribution to one of six environmental objectives; not impose significant harm to other objectives; and meet a set of minimum safeguards – essentially minimum standards for doing business. And legislation for the first two environmental objectives was planned by the end of 2022, with the remaining four to follow by the end of 2023.

Needless to say, this timeline has not been met, due in part to the delay in repealing EU legislation and its replacement by suitable UK legislation. It was finally accepted in early 2023 that the taxonomy, would be delayed.

The omission of the chemical industry, a major European industry sector, from the European Commission’s taxonomy proposals has a major impact not just on the EU industry but also on the UK chemical sector. In October 2022, the UK GTAG said widespread or large deviations from the EU taxonomy which would make the UK Green Taxonomy substantially different, should be avoided or be supported by substantial benefits.

GTAG has said that the UK Green Taxonomy should be at least as ambitious in Technical Screening Criteria (TSC) and coverage as the EU or other significant international taxonomies – UK criteria should be internationally comparable, ie threshold – or process-based and measurable. It should strive to give certainty, but where there is uncertainty, the UK should commit to a strategy that gives a clear indication of the direction of travel.

If the UK is to achieve its target of becoming a technological superpower, having clear guidance for investors through the Green Taxonomy will be essential to encourage the funding of the necessary technological innovation.