ARTICLE
25 October 2022

Sustainable Finance Insights Series - 17 | Fossil Gas And Nuclear Activities Are Considered Aligned With The Taxonomy Regulation – What Are The Ramifications?

The Commission Delegated Regulation (EU) 2022/1214 of 9 March 2022[1] ("Nuclear and Gas Regulation") was published on 15 July 2022 after finally being approved...
Luxembourg Environment

The Commission Delegated Regulation (EU) 2022/1214 of 9 March 20221 ("Nuclear and Gas Regulation") was published on 15 July 2022 after finally being approved by the European Parliament after a long and difficult road.

The Nuclear and Gas Regulation recognises fossil gas and nuclear activities as environmentally sustainable economic activities - with respect to 6 environmental objectives2 - by adding a large number of economic activities linked to these energies in annexes I and II of the Commission Delegated Regulation (EU) 2021/2139 of 4 June 20213 that supplements the Regulation (EU) 2020/8524 ("Taxonomy Regulation") by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation, while at the same time not significantly harming any other environmental objectives and complying with minimum social safeguards.

Based on article 10 (2) of the Taxonomy Regulation5, the Nuclear and Gas Regulation recognises that some economic activities linked to fossil gas and nuclear energies are contributing substantially to climate change mitigation "[...] in the absence of technologically and economically feasible low-carbon alternative at a sufficient scale to cover the energy demand in a continuous and reliable manner"6. These activities are considered environmentally sustainable on a temporary basis to ensure the decarbonisation pathway, but not under any conditions – the annexes to the Nuclear and Gas Regulation set out the conditions that must be met in terms of CO2 emissions and safety in order for these economic activities to be considered sustainable, whereas compliance with those conditions shall be verified by an independent third party.

The Nuclear and Gas Regulation is the third - long-awaited - delegated act that supplements the Taxonomy Regulation and constitutes a major boost for the financing of companies that, inter alia, operate and develop nuclear or fossil gas power plants, as a variety of EU measures aim to direct investments into sectors of activity that are in line with the Taxonomy Regulation. In practice, undertakings engaged in fossil gas and nuclear activities will borrow at more attractive interest rates and will be able to raise capital more easily.

As a matter of fact, it is worth recalling that  the Taxonomy Regulation is a classification system introduced to establish a list of environmentally sustainable economic activities. The aim behind the Taxonomy Regulation is to create a common EU classification of economic activities which are considered sustainable or not and contributing this way to the EU green transition.

However, while the Nuclear and Gas Regulation is a welcome boost for businesses in these sectors, there are pitfalls.

It should be noted that (i) the inclusion of these fossil gas and nuclear activities will be limited in time, (ii) the time limit depends on the type of activity in question, and (iii) this time limit will be regularly reviewed by the European Commission, which may if appropriate, amend it to be in line with scientific and technological developments. This is likely to create uncertainty in the decisions of institutional investors, issuers of financial products promoting fossil gas and nuclear energies, and undertakings engaged in the fossil gas and nuclear business.

It also appears from the recitals of the Nuclear and Gas Regulation that "non-financial and financial undertakings  [shall] provide investors with a high degree of transparency concerning their investments in fossil gas and nuclear energy generation activities for which technical screening criteria should be laid down" and therefore annexe III of the Nuclear and Gas Regulation provides a standard templates for these disclosures.

Next steps

The Nuclear and Gas Regulation will enter into force on 1 January 2023 to enable non-financial and financial undertaking to assess their activities in the light of the Nuclear and Gas Regulation and to disclose the relevant information as per annexe III of the Nuclear and Gas Regulation.

It is expected that the European Commission will propose to amend the pre-contractual disclosures and periodic reports requirements of financial products, if those financial products are exposed to fossil gas and nuclear energy activities to provide for full transparency over the whole life of those financial products. To this end, the European Supervisory Authorities (i.e. the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority) published on 30 September 2022 the  draft regulatory technical standards regarding the disclosure of financial products' exposure to investments in fossil gas and nuclear energy activities under SFDR. The European Commission will examine these draft regulatory technical standards and will have to approve them.

In order to raise awareness of the end-investors, the European Commission will also consider amending the requirements for investment firms to take into account the sustainability preferences of their clients, in order to include their preferences regarding nuclear and gas energy.

Footnotes

1 Commission Delegated Regulation (EU) 2022/1214 of 9 March 2022 amending Delegated Regulation (EU) 2021/2139 as regards economic activities in certain energy sectors and Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities.

2 The 6 objectives of the Taxonomy Regulation are the following: (i) climate change mitigation, (ii) climate change adaptation, (iii) sustainable use and protection of water and marine resources, (iv) transition to a circular economy, (v) pollution prevention and control, and (vi) protection and restoration of biodiversity and ecosystems.

3 Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives.

4 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 ("SFDR").

5 Which allows to qualify a particular economic activity as contributing substantially to climate change mitigation if, among other things, there is no technologically and economically feasible low-carbon alternative.

6 Recital 6 of the Nuclear and Gas Regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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