Should net zero lobbying be based on the EU taxonomy?

The EU developed the green taxonomy to steer the private sector, but ignore it when it comes to public spending and industrial policy

It’s been a year since shareholders laid down their shared expectations for companies on climate lobbying.

The ‘global standard on responsible corporate climate lobbying’ is backed by all the big investor bodies in sustainable finance, and identifies 14 ways in which companies should align their policy engagement with the goals of the Paris Agreement.

It’s an area that’s been gathering steam over the past few years. Shareholder resolutions asking companies to disclose the alignment between their lobbying and their climate pledges have been filed, and received majority backing, at the likes of Exxon, Phillips66 and Delta.

And regulators are beginning to throw their weight behind the trend. In proposed guidance published in November, the UK’s Transition Plan Taskforce made it clear that lobbying would be a core part of any credible net zero strategy. The body, launched by UK Treasury with input from the Financial Conduct Authority and others, wants companies to disclose how they engage with regulators and governments to support their climate objectives.

But there has been little public discussion about the benchmarks companies should use to ensure credible, efficient lobbying – especially in relation to real-economy policy.

There aren’t many obvious options. In reality, the commitments countries made as part of the Paris Agreement, known as Nationally Determined Contributions, aren’t actually Paris aligned. Sectoral pathways are beginning to be developed, and will be essential to steering real-economy decarbonisation, but they’re often created outside of government and are still being fleshed out.  

Perhaps the most obvious environmental benchmark to underpin lobbying in Europe is the EU’s green taxonomy.

The framework, which seeks to outline which business activities support the bloc’s net zero ambitions, already has official buy-in from the top levels of the EU, and has been signed into law by Member States and European Parliament.

It is detested by most of the companies and financial institutions now legally obliged to report against it, but that’s partly because it bears no relationship to economic strategy. Entities have to wade through impossibly restrictive, granular criteria in order to produce the required disclosures, but – beyond marketing perks - there are no incentives to increase exposure to eligible activities. Despite being hailed by the European Commission as a way to “provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable,” it is ignored by almost all policymakers in the region, including most departments of the European Commission itself.

But, if the EU thinks the taxonomy reflects what a climate-aligned economy looks like, then it should be perfect for steering industrial and fiscal policy - and therefore lobbying.

Companies could call on governments not to introduce new subsidy regimes that make it more difficult for taxonomy-eligible activities to compete, for example. Or to commit to undertaking impact assessments on any new tax incentives, to see what effect they would have on the taxonomy’s six high-level environmental objectives (climate mitigation and adaptation, waste, water, biodiversity and the transition to a circular economy).

Lobbying could also involve asking governments to embed the taxonomy’s activities into their procurement plans, perhaps by only using companies with a certain level of taxonomy alignment in key areas. Or in overall public spending: pushing EU Member States to commit to allocate a certain percentage of spending to taxonomy-aligned economic activities, with a view to increasing this over time.

The private sector would need to start by asking for the current level of alignment in these areas, in much the same way as the EU is asking companies and financial institutions to disclose alignment through the taxonomy regulation.

There are downsides to using the taxonomy to steer net zero policy engagement. Many argue the framework is fundamentally ill-conceived and its influence should therefore my minimised, not amplified. A lack of definitions beyond green (transitional and polluting activities, for example, are out of scope) also puts limitations on how useful a guide it can be for the real economy. And the fact the taxonomy now treats gas as climate-aligned means that even its green definitions aren’t all scientifically credible.

Complexity is another stumbling block – both in relation to the taxonomy and the policymaking ecosystem. Government budgets can be hard to map at a granular level. This is an issue that cropped up in the early years of the sovereign green bond market, sometimes resulting in lower reporting expectations than would be placed on corporate issuers. And then there is the complexity of establishing which government departments and regulators would need to be lobbied on what parts of the taxonomy.

But asking states to align public money and support with the climate framework developed for the private sector would be one way to steer the real economy in the same direction as the financial markets. And would give the corporate world an environmental benchmark on which to centre their growing net zero lobbying efforts.