EU Taxonomy: Will ‘Requests for Exemption’ be the Next Challenge?

Synopsis: In our previous insight on EU Taxonomy, we discussed the role of power politics in the development of the EU Taxonomy and whether ‘scientific truth’ took a backseat to ‘political acceptability’ when it came to Forestry, Nuclear Energy and Gas (EU Taxonomy: Political Realities vs Positive Change). Prior to publishing the EU Taxonomy, the European Commission faced tremendous pressure from financial and industry lobbies to dilute the provisions, with some industry associations also requesting for extension of the timeframe for implementation of the disclosure obligation. There were also allegations that large corporates were pushing to weaken what qualifies as a sustainable energy source. We, at EMAlpha, think that the next hurdle for EU Taxonomy may come as “requests for exemption”. Sweden’s Financial Supervisory Authority (FSA) is already arguing that Sweden’s pension foundations should be exempted from complying with the Taxonomy rules. It would be intriguing to see where the pendulum swings next.

‘The Need for Political Consensus’ and EU Taxonomy

Among all the global economic blocks, the European Union (EU) has been the most proactive in dealing with the challenges confronting the world. The proposal of EU Taxonomy gives merit to that claim. However, developing political acceptability for a proposal and building political consensus is a taxing problem even in the best of conditions. The EU Taxonomy impacts multiple countries, each with a different definition on how best the climate change can be dealt with. These countries have to protect the local industries as well as minimize the transition pain for the population while not falling short of their genuine claims.

Since the announcement of the EU Taxonomy’s April 2021 package, there have been several topics that are being seen as a political compromise between what was considered as ‘science-based evidence’ and what the EU member states wanted. This has created controversies around the EU taxonomy’s proposals. The question is: Did ‘practical’ and ‘acceptable’ facet get precedence over ‘stringent’, ‘scientific’ and ‘effective’? Since many of the topics are politically sensitive, the regulation and EU Taxonomy proposals have to be based on an optimization process, balancing the scientific evidence and political acceptability.

There were three major areas in which the political considerations played a role;

  • EU taxonomy’s forestry criteria – After the announcement of detailed proposals under what would classify as sustainable activity, there was a huge controversy around EU taxonomy’s forestry criteria. Several activist groups and NGOs alleged that these rules were too weak and it was ironical that they had classified some of the extremely damaging activities such as industrial logging and the burning of trees and crops as ‘sustainable’ investments. Some of these organizations also decided to suspend their participation in the European Commission’s Sustainable Finance Platform in protest.
  • The controversy over Nuclear Power – The inclusion/exclusion of nuclear energy in the EU taxonomy was a much-debated subject throughout the negotiations on the Taxonomy Regulation. And finally, there was no definitive solution. The Technical Expert Group on Sustainable Finance did not provide a conclusive recommendation on nuclear energy and indicated that a further assessment of the ‘do no significant harm’ aspects of nuclear energy was necessary. The task, of course, is not easy because despite all the negative perception, Nuclear is still very competitive on GHG emissions.
  • The ambiguity on Gas – The European Union’s Taxonomy announcement on April 21 also delayed decisions on gas. Prior to that, there was a technical evaluation of different industries to assess them for their environmental impact so that they could be classified accordingly. Gas had major support from France, Hungary, Poland, Romania, Czech Republic and the countries in eastern and southern Europe. In fact their advocacy for gas was so fierce that some of them even threatened to veto an earlier draft because it did not label gas as a “green” investment.

Resistance to EU Taxonomy from different quarters

In a report by RECLAIM Finance which was published in December 2020, it was highlighted that “the European Commission faces tremendous pressure from financial and industry lobbies to dilute the provisions under EU Taxonomy”. France is a prime example of how the EU Taxonomy has led to a serious resistance among stakeholders. In the country, there was considerable opposition from the three main financial professional federations (FBF, FFA, AFG), the federation of employers (MEDEF) and the association of Large Companies (AFEP), as well as the two major power companies (EDF and Engie) and all of them opposed a taxonomy for polluting activities. As per the report, some of the organizations did it indirectly as many of them lobbied against climate regulation or let their professional or interest groups carry out the anti-climate lobbying for them.

Surprisingly, the opposition was not just limited to the European Union. An InfluenceMap report has talked about lobbying by the EU trade associations and while majority of the lobbying came from within the European Union, there was also opposition from international business trade associations. These associations had expressed concerns about the global implications of an overambitious EU taxonomy. For example, Japan Business Federation (Keidanren) led a group of Japanese trade associations in engaging directly with the European Commission to oppose a progressive Taxonomy. Keidanren argued that the Taxonomy could “destabilize international financial markets” and that standardisation could stifle “business-led disruptive innovation”. Globalisation has ensured that change in regulation in an area can impact others too and hence, the developments on EU Taxonomy are being keenly watched by the global industries, wanting to protect themselves from any adverse potential impact.

Some of the most polluting industries from European Union were more subtle because they had to act under constraints considering general perception and pressure from media and the public. For example, the Oil & Gas Exploration and Production industry. The International Association of Oil & Gas Producers’ (IOGP) member companies account for approximately 90% of oil and gas produced in Europe and while IOGP supported the goals of the Paris Agreement and the EU’s objective of climate neutrality by 2050, they also highlighted the need for a practical approach. More specifically, IOGP highlighted that putting thresholds only on a tank-to-wheel (tailpipe) value is not at all appropriate and could even lead to more GHG emissions in real-world performance than shown by the reduction at the tailpipe. The Association also said that reporting on taxonomy-compliant activities will require companies to review their reporting processes and establish new systems and reporting functionalities. Hence, the Association recommended that the European Commission may assess the possibilities to consider extending the timeframe for the implementation of the disclosure obligation or retain the principle of one or two pilot years.

There were also reports and allegations that BP was pushing the European Union to weaken what qualifies as a sustainable energy source. BP’s submission recommended that natural gas have its “own dedicated threshold… to reflect its role to facilitate an affordable and fair energy transition”. However, BP has refuted these charges and, in its statement, the company said: “We strongly support the EU’s climate goals, which are in line with our purpose of reimagining energy and our net zero ambition. We welcome the intention of the taxonomy regulation and appreciate the work the EU Commission is doing to encourage sustainable investments.” The difference is technical because critics argue that natural gas could not be considered transitional since low- and zero-carbon alternatives already exist.

The Vertical Split

According to a report published in April 2021 in Reuters, the European Union countries were sharply divided over whether to delay landmark green investment regulations or not. Just a day before publishing, eight heads of government urged the European Commission to push back the rules. The states hugely disagreed over what should be labelled as green. The prime ministers of Poland, Hungary, the Czech Republic and five other countries wrote to the Commission President, opposing the plan to delay gas and nuclear, and urged the Commission to only publish the rules when they could address all energy technologies. This letter was also signed by the president of Cyprus and the prime ministers of Bulgaria, Malta, Romania and Slovakia.

On the other side, seven EU countries including Germany, Spain and Austria wrote to the Commission on April 16, urging it not to delay the rules, as per the same media report. This letter was also signed by Belgium, Denmark, Ireland and Luxembourg. In fact, these contrasting views were the main reasons why the final publishing of the draft was delayed. The European Commission had intended to finish the rules in January, but deferred that plan to April after its original proposal denying gas power plants a green label led to major opposition from central and eastern states that see gas as a necessary fuel to make the transition from coal. On the other hand, the technical experts and wealthier states from Western Europe and the Nordic states were opposed to classifying gas as green.

There are other issues as well. For example, several EU member states still subsidize the fossil fuels industry directly or indirectly through subsidies, incentives, tax breaks, and exemptions. There is no clarity yet on how to tackle this issue. Apart from that, some countries are more exposed to fossil fuels than others and hence, their opposition will naturally be stronger. Similarly, there are challenges with how biofuels need to be treated. Supporters claim that biofuel is a clear alternative to conventional fuel while detractors argue that biofuel is responsible for deforestation.

There are technical inconsistencies as well such as how offsetting should be calculated. There is no consensus among the EU states on that matter because of individual preferences for various technologies. This makes transition tricky.

Resistance and Requests for Exemption

We, at EMAlpha, think the next challenge for EU Taxonomy may come as “requests for exemption”. Well, how will that play out? If industries see the compliance with these regulations as cumbersome or if industries realize that the EU Taxonomy will have a significant negative impact on their businesses, they will be apprehensive. It is possible that some of these fears might be totally irrational but if in their initial assessment, these industries think that the EU Taxonomy could harm them either by making them less competitive or by impacting their profitability; they will lobby hard to get an exemption. The reasoning offered will be different in each case and will be specific to the context such as applicability and lack of necessary skills, but the objective will be to either delay compliance or drop it altogether.

Some of these discussions have already begun. Sweden’s Financial Supervisory Authority (FSA) is arguing that Sweden’s pension foundations should be exempted from complying with the EU’s green taxonomy rules. The Swedish FSA argues that these pension foundations do not offer financial products and hence should not comply. It has also highlighted a practical challenge in the fact that the organization can’t assess whether underlying investments complied with the EU rules, because it did not have the required expertise and skills to do so. The proposed EU regulation also warrants that even insurance intermediaries and securities firms with fewer than three employees have to comply with the regulation. The FSA has said that a pension foundation’s only task was to manage capital, and it did not normally pay pensions.

Similarly, the challenges are equally stiff and enormous for some of the industries which might not even be significantly impacted. As per a report published in February by Bloomberg Intelligence, only a few buildings built before 2021 would be eligible for good scores under the new EU rules. The Real estate investors, thus, will face challenge in complying with the EU’s Taxonomy rules. So, there is a strong case to build that the real estate asset managers may request for exemptions from the regulators. Even if the exemption is not requested or is not granted, the task for asset managers in real estate will be daunting because their portfolio will have to undergo a massive transition. This is not easy in terms of execution and may also lead to an impact on portfolio performance. This will adversely impact investment managers who have built their expertise in relatively smaller companies.

How EMAlpha can help?

While the European Commission needs to incorporate concerns of stakeholders, there will also be a need for a solution which looks at a more detailed classification of industries and sectors. At EMAlpha, we have always believed in the premise that for any product to work better for a client, ‘more power to user’ should always be the core principle we must adhere to. Hence, we have incorporated a Flexible Framework Management System, based on EMAlpha’s proprietary technology making inferences framework agnostic.

This also offers a quick adaptation for the users (both companies and investment advisors). As such, the EMAlpha’s ESG and Sustainability offering is centred around addressing some of the most critical issues. The EMAlpha algorithms provide a choice for separate relevant frameworks and these can be used to review the performance more transparently. This not only helps the investment advisors but also makes the clients understand the granular details better which in turn is helpful for them to understand their preferences better. To achieve this, we focus on the following;

  • Go beyond the official reported version – The data source matters and there is a need to look beyond what the companies are reporting and what the official version is. Although it is essential to rely on the company reported data because other sources might not be collating as much information, often there are sources for environment related information. They include the information disclosure as mandated by regulators and the EMAlpha algorithms scan through unstructured data to pick the unofficial information too.
  • No two ESG scores are same despite same headline figure – It is the composition that makes a big difference and all the three parameters that make up ESG need to be evaluated separately. The EMAlpha algorithms provide separate scores for E, S and G so that an investor can review the sectoral performance more transparently. Over and above, a key feature of EMAlpha’s NLP algorithms is that the attribution analysis is fairly simple and straight forward.
  • An ESG score without context and background is meaningless – The ESG is as much about intent as it is about execution. For this balanced evaluation, having an understanding of the local factors is very crucial. A very good ESG track record (probably more driven by excellent performance in E and/or S) may hide serious Governance related risks and the investors can only ignore them at their own peril. EMAlpha analysis meticulously incorporates this critical part of the ESG evaluation jigsaw puzzle.


  1. Feedback from: IOGP – International Association of Oil & Gas Producers https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12302-Sustainable-finance-EU-classification-system-for-green-investments/F1303590_en (23rd May 2021)
  2. Swedish FSA backs pension foundations’ bid for EU taxonomy exemption https://www.ipe.com/news/swedish-fsa-backs-pension-foundations-bid-for-eu-taxonomy-exemption/10052886.article (23rd May 2021)
  3. IN THE SHADOWS: Who is opposing the EU taxonomy for polluting activities https://reclaimfinance.org/site/wp-content/uploads/2020/12/Report-In-the-shadows-Who-is-opposing-a-taxonomy-for-polluting-activities-Reclaim-Finance.pdf (23rd May 2021)
  4. How Japanese Industry Lobbied Against a Strong EU Taxonomy https://content.influencemap.org/report/-2a321cd8bdc7bd87c6a41a86fbfe62e9 (23rd May 2021)
  5. EU countries split over whether to delay green investment rules https://www.reuters.com/business/sustainable-business/eu-countries-split-over-whether-delay-green-investment-rules-2021-04-20/ (23rd May 2021)
  6. The EU’s Much-Flaunted Climate Leadership is Full of Loopholes https://carnegieeurope.eu/strategiceurope/84506 (23rd May 2021)
  7. Real estate managers face ESG challenge in taxonomy compliance https://www.investmentweek.co.uk/news/4026918/real-estate-managers-esg-challenge-taxonomy-compliance (23rd May 2021)
  8. NGOs walk out on EU green finance group over forestry, bioenergy rules https://www.euractiv.com/section/energy-environment/news/ngos-walk-out-on-eu-green-finance-group-over-forestry-bioenergy-rules/ (Accessed on 22nd May 2021)
  9. EU legislation to prevent greenwashing becomes ultimate greenwashing tool- BirdLife suspends activities in Commission Platform on Sustainable Finance https://www.birdlife.org/europe-and-central-asia/news/eu-taxonomy-greenwashing-ngos-walk-out-platform-sustainable-finance_21April2021 (Accessed on 22nd May 2021)
  10. An open letter to the European Commission sent by Civil society organisations and scientists on 31st March 2021 https://www.birdlife.org/sites/default/files/joint_letter_eu_commission_platform_sustainable_finance_taxonomy_greenwashing_31march2021.pdf (Accessed on 22nd May 2021)
  11. Last minute EU taxonomy changes water down sustainability criteria for waste, NGOs say, changes made since a draft leaked last week have weakened criteria on waste management. https://www.euractiv.com/section/circular-materials/news/last-minute-eu-taxonomy-changes-water-down-sustainability-criteria-for-waste-ngos-say/ (Accessed on 22nd May 2021)
  12. E.U. Ignores Science-Based Advice, Labels Gas As Green In Sustainable Taxonomy Proposal https://www.greenqueen.com.hk/e-u-ignores-science-based-advice-labels-gas-as-green-isustainable-taxonomy-proposal/ (Accessed on 22nd May 2021)
  13. Farming giants lobby EU to weaken proposed biofuel standards https://unearthed.greenpeace.org/2021/04/20/eu-lobby-biofuel-biomass-bioenergy-renewable-sustainable-climate/ (Accessed on 22nd May 2021)
  14. MEP Canfin: The French hard line on nuclear is a dead end, the hard line is defended by France over the inclusion of nuclear power in the green finance taxonomy. https://www.euractiv.com/section/energy-environment/interview/mep-canfin-the-french-hard-line-on-nuclear-is-a-dead-end/ (Accessed on 22nd May 2021)
  15. Draft EU taxonomy sparks discord over gas, nuclear future https://www.montelnews.com/en/story/draft-eu-taxonomy-sparks-discord-over-gas-nuclear-future/1207136 (Accessed on 22nd May 2021)
  16. NGOs demand place for nuclear in EU Taxonomy https://world-nuclear-news.org/Articles/NGOs-demand-place-for-nuclear-in-EU-Taxonomy (Accessed on 22nd May 2021)
  17. 7 EU leaders urge support for nuclear https://world-nuclear-news.org/Articles/Message-Nuclear-is-green-energy,-say-7-EU-leaders (Accessed on 22nd May 2021)
  18. Reprieve for Nuclear, Gas in EU’s Sustainable Finance Taxonomy Rules https://www.powermag.com/reprieve-for-nuclear-gas-in-eus-sustainable-finance-taxonomy-rules/ (Accessed on 22nd May 2021)
  19. EU spells out criteria for green investment in new ‘taxonomy’ rules https://www.euractiv.com/section/energy-environment/news/eu-spells-out-criteria-for-green-investment-in-new-taxonomy-rules/ (Accessed on 22nd May 2021)
  20. BP “lobbying to weaken” EU green investment: watchdog https://energy.economictimes.indiatimes.com/news/oil-and-gas/bp-lobbying-to-weaken-eu-green-investment-watchdog/82172362 (Accessed on 22nd May 2021)
  21. Natural gas bashing is trendy, but is it constructive? https://www.euractiv.com/section/energy-environment/opinion/natural-gas-bashing-is-trendy-but-is-it-constructive/ (Accessed on 22nd May 2021)
  22. EU indecision over gas as green imperils supply security: German Utilities https://www.cleanenergywire.org/news/eu-indecision-over-gas-green-investment-imperils-supply-security-german-utilities (Accessed on 11th May 2021)
  23. Sustainable Finance and EU Taxonomy: Commission takes further steps to channel money towards sustainable activities https://ec.europa.eu/commission/presscorner/detail/en/IP_21_1804 (Accessed on 22nd May 2021)

EMAlpha Products and Services

In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.

Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.

EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should view ‘E’, ‘S’ and ‘G’ individually and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at research@emalpha.com.

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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