What is the EU Taxonomy?
Essentially, this is an attempt to identify certain economic activities that qualify as 'environmentally sustainable' in order encourage investment in those activities.
The EU Taxonomy Regulation (the 'Taxonomy') came into force on 12 July 2020, and requires that in order for an economic activity to be 'environmentally sustainable' it must meet each of the following four conditions:
- it contributes substantially to at least one of the six environmental objectives set out below;
- it does not significantly harm any of the other environmental objectives;
- it is carried out in compliance with certain minimum social safeguards; and
- it complies with technical screening criteria, which the European Commission is to establish by way of delegated acts.1
The six environmental objectives are as follows:
i. climate change mitigation;
ii. climate change adaptation;
iii. the sustainable use and protection of water and marine resources;
iv. the transition to a circular economy;
v. pollution prevention and control; and
vi. the protection and restoration of biodiversity and ecosystems.1
The Taxonomy requires the European Commission to identify what such environmentally sustainable activities might actually be, by 'defining technical screening criteria for each environmental objective through delegated acts'. The first of these delegated acts is expected to be adopted this month, addressing climate change mitigation and adaptation, with a second expected in June.
Why does it matter to aviation?
A list of definitions and qualifying activities might seem like something best left to the lawyers, but the Taxonomy is intended to inform and energise green investment decisions generally - as the European Commission describes it:
by providing appropriate definitions to companies, investors and policymakers on which economic activities can be considered environmentally sustainable, it is expected to create security for investors, protect private investors from greenwashing, help companies to plan the transition, mitigate market fragmentation and eventually help shift investments where they are most needed.3
Aligning the meaning of the words we use when talking about these investments and policies should, in theory, help us to make genuine progress towards environmental goals, with a shared vocabulary enabling us to measure this progress more accurately.
The need for this shared vocabulary is particularly pressing in aviation, which is so visible on the global stage and under so much pressure to make improvement - not to mention in need of investment after the pandemic. By way of example: few would argue against the proposition that sustainable aviation fuel has a critical role to play in the reduction of the aviation industry's greenhouse gas emissions. But do we even know what sustainable aviation fuel is?
An opinion piece in the Financial Times this year highlighted the extent to which the meaning of a seemingly-familiar term like 'sustainable aviation fuel' is subject to politics and uncertainty - and by implication, the incredible difficulty of just getting the EU nations to agree on the basics. In the context of other regulations mandating use of green aviation fuel in the EU, Peggy Hollinger wrote:
Member states will push to water down or toughen up rules to suit their industries. Sweden, for example, has indicated it wants a broad definition for sustainable fuels, including crop-based feedstock. Germany, on the other hand, is opposed to biofuels and wants to promote the use of next generation electrofuels, created by combining hydrogen extracted from water with carbon taken from the air.4
If we struggle to define what a single, centrally important term like this means, how are we going to know if activities are sustainable or not? Or what investments in these activities are actually going to deliver?
The AWG's response
The Aviation Working Group has contributed five principles which it suggests be used by the European Commission when considering what might constitute environmentally sustainable activities within aviation finance and leasing. These are:
- Principle 1: feasible improvement standard
- Principle 2: incentive standard
- Principle 3: aircraft class differentiation standard
- Principle 4: ICAO certification standard
- Principle 5: data-based self-reporting standard
The letter to the Commission also explains certain issues unique to aviation, to justify why certain activities should, in the context of aviation finance and leasing, be considered sustainable.5 For example, for the feasible improvement standard, the AWG outlines the technological and operational restrictions to which aviation is subject, and argues that on this basis, 'the use of less carbon-intensive aircraft should be considered to 'contribute substantially' to climate change mitigation, notwithstanding that this may be inconsistent with the approach taken in respect of other less technologically constrained sectors'.
However, whether these principles will ultimately inform the technical screening criteria devised by the European Commission for aviation remains to be seen.
What will any of this actually do?
Initiatives aimed at increasing green investment are important, and momentum is growing.
For example: last week, more than 300 companies in the United States (including Apple, Google, McDonald's, Nike and Walmart) submitted a letter to the Biden administration urging a substantial increase to the country's targeted emissions cuts under the Paris Agreement. The letter specifically notes that 'new investment in clean energy, energy efficiency, and clean transportation can build a strong, more equitable, and more inclusive American economy'6. As the New York Times reported, this is 'all the more remarkable because Mr. Biden's plan for curbing climate change would be paid for in large part by raising corporate tax rates'7 - and demonstrates the growing economic imperative of making genuine improvements in emissions. The article also quoted Anne Kelly from Ceres, which was involved in the letter, saying, "I think this signals a major shift in the corporate community's understanding of the urgency of climate change as a systemic financial risk."8
This is positive, because ultimately it is money that executes (or doesn't execute) our dizzying array of lists of environmental niceties.
In this blog piece alone we have looked at four qualifying conditions, six environmental objectives and five further standards applicable to aviation. We see an endless parade of well-intentioned principles and guidelines and schemes and frameworks and consultation programs and strategic targets, none of which seem to bite on anything and together seem almost totally emptied of actual content ('Meaningless! Meaningless!' intones the voice from Ecclesiastes.) - so perhaps the Taxonomy, once fully up and running and perhaps informed by the AWG's principles, by returning to the basics of determining what things actually mean, will enable us to more accurately identify the aviation industry's sustainability problems, and effectively deploy capital to address them.
In short: to define and conquer.
1. 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; Article 3
2. Ibid; Article 9
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