New set of EU Taxonomy criteria
Last June, the European Commission (EC) adopted a new set of EU Taxonomy criteria for economic activities that contribute to one or more of the non-climate environmental objectives:
- sustainable use and protection of water and marine resources
- the transition to a circular economy
- pollution prevention and control
- the protection and restoration of biodiversity and ecosystems
It completes the set of environmentally sustainable activities covered by the Taxonomy Regulation. For each of these six environmental objectives, the specific criteria for activities covered by the Taxonomy Regulation are described in corresponding annexes. However, activities may be added to these annexes based on input from the Platform on Sustainable Finance.
Amended annexes climate mitigation/adaptation
As an example of this approach, at the same time of publishing the four non-climate related environmental objectives, the EC also added several new activities to the existing environmental objectives relating to climate change mitigation and adaptation. These new activities include activities in the industrial and transport sectors.
Shortly after this publication, an article on deep sea mining caught our eyes.
What is deep sea mining?
Companies are ready to start mining metals in the sea, at a depth of 4.5 kilometers. This is where manganese nodules lie. Manganese nodules contain cobalt and nickel, metals used in electric cars, for example. A shortage of these metals in the coming years is foreseen and extracting them from the seabed could help make up the shortfall.
Most of these metals are found in international waters which basically means that they belong to everyone. That is why countries need to find a solution through the United Nations, in this case the International Seabed Authority. This solution is not close at hand. Talks have been going on since 1994, without success.
Also closer to home, off the coast of Norway, large quantities of metals and minerals were discovered on the seabed earlier this year. In addition to the discussion on ownership as described above, the question arises how deep-sea mining could qualify in the European Union’s framework for sustainable financing.
Deep sea mining as an (environmentally) sustainable investment?
As a fund manager or asset manager, would you include an investment in the technology that can extract manganese nodules from the ocean floor as an investment that is environmentally sustainable under the Taxonomy Regulation in your portfolio? Or as a sustainable investment under the SFDR? After all, its purpose is to produce batteries for electric cars. We’ll elaborate on this below.
First the Taxonomy Regulation
To assess whether an investment is environmentally sustainable, the economic activity should meet the following criteria:
- contributes substantially to one or more of the environmental objectives;
- does not significantly harm any of the environmental objectives;
- is carried out in compliance with the minimum social safeguards (human and labor rights);
- complies with the technical screening criteria set by the Commission for the each of the six environmental objectives.
For the first requirement, you should check whether this activity is described in the annexes corresponding to the six environmental objectives of the Taxonomy Regulation.
There are currently no activities in the Taxonomy Regulation covering this economic activity. Nor for the extraction of raw materials on land. Other parts in the production process for electric batteries, for example the processing of these raw materials, do. Mining metals, and certainly extracting them from deep sea water, falls outside the scope of the Taxonomy Regulation. So even though extracting raw materials contributes to the energy transition, you should not include this activity as a Taxonomy aligned investment in your portfolio at this point in time. After all, only economic activities mentioned in the Taxonomy Regulation may be considered taxonomy aligned.
Then the SFDR
A sustainable investment under the SFDR means:
- an investment in an economic activity that contributes to an environmental and/or social objective;
- do not significantly harm any of those other (environmental or social) objectives; and
- the investee companies follow good governance practices.
The requirement under point 1 can be fulfilled; the extraction of manganese nodules contributes to the energy transition and thus has an environmental objective. The SFDR does not require the activity at hand (i.e., the extraction of manganese nodules) to be tested against a prescribed list (annex), as the Taxonomy Regulation does.
The second requirement refers to the Do No Significant Harm (DNSH) principle.
The risk of exploitation of workers from land-based mining is known to be high. Only a few US and EU companies are currently able to apply deep-sea mining technology. With the company information now available, one could argue that social objectives are not seriously harmed.
As too little is known about the impact of deep-sea mining on marine life, it is not (yet) possible that no environmental objective will be seriously harmed. Think of the loss of biodiversity.
In conclusion, mining manganese nodules at a depth of 4.5 kilometers is not considered a sustainable investment under the SFDR nor a sustainable environmental activity under the Taxonomy Regulation.
A green stamp after all?
Striking in this regard is the European Union’s regulation known as the Critical raw materials act’. This regulation aims to increase the extraction of critical raw materials, to speed up and achieve the renewable energy production targets of the EU. This regulation designates critical raw materials and – surprisingly (or not) – all metals present in manganese nodule are designated as such.
“We are going to have to do more mining in Europe,” said an EU Commissioner. This statement underpins rumors that the European Union will begin to include the extraction of critical raw materials as a ‘priority’ in its green investment regulations. As a result, manganese nodule mining – like fossil gas/nuclear energy – could qualify ‘green’ in the future.
Should you have to qualify such an investment now, you have no choice but to qualify it as grey.
Want to know more?
Do you need help qualifying investments and complying with sustainability regulations such as the Taxonomy Regulation or the SFDR? Our ESG specialists are happy to help. Please do not hesitate to contact us.