Dr. Anna Bredima (firstname.lastname@example.org) talks to Katalin Dobranszky-Bartus, Director of Economic and Financial Affairs at European Community Shipowners’ Associations (ECSA, email@example.com)
Taxonomy comes from the Ancient Greek word “taxinomia”, meaning “the science of classification”.
As there has been a steady retreat of the biggest world banks from shipping, the sector is in search of alternative sources of financing. Taxonomy will put in place a whole spate of technical requirements on shipping activities to qualify as “green” in order to attract banks and financiers
The European Maritime Law Organization (EMLO), a non-profit organization encompassing outstanding legal practitioners and academics, organized a series of webinars in 2021 dealing with environmental aspects and sustainability of maritime transport. One of those addressed the European environmental taxonomy and ship finance. The webinar took the format of a Questions and Answers (Q&A) session.
Dr. Anna Bredima, lawyer, member of the Board of EMLO and the Board of ECSA (European Community Shipowners’ Associations) representing the Cyprus Union of Shipowners (CUS), interviewed Mrs. Katalin Dobranszky-Bartus, Acting Secretary General of ECSA and its Director of Economic and Financial affairs in a dual capacity with a background in economics and law.
This interview gives a summary of the challenges and opportunities the shipping industry, as a transitional industry, is facing.
A.B What is the main purpose of the Taxonomy Regulation regarding shipping and what is the scope of operations of the Delegated Act 1 (DA1 ) concerning maritime activities?
K.B In order to understand the initial aim and the scope of this legislative initiative, we need to go back in time. The Juncker Commission –after signing the Paris agreement– published its Communication on Sustainable Finance with the following idea behind it: “if there is financing available only for sustainable projects in Europe, businesses will only have sustainable activities”.
Hence, they targeted different initiatives towards the financial services sector and investors to “encourage” them to finance only sustainable projects. The Green Deal of the von der Leyen Commission made taxonomy a horizontal regulatory initiative.
Taxonomy is one piece of the Sustainable Finance Agenda, which provides a definition for classifying which economic activities can be considered green. It is economic activity based assessment and not looking at company eligibility. Eligible economic activities are listed by NACE Codes (Nomenclature of Economic Activities) and the economic activity for the maritime industry is asset based, i.e. it is looking at the vessel.
Whether the eligible activities are taxonomy aligned or not, they have to meet three sets of requirements:
1) substantial contribution (SC) to one or more environmental objectives defined by the Taxonomy Regulation
2) the Do No Significant Harm (DNSH) to the other environmental objectives
3) compliance with social and labour minimum requirements, as set out by international conventions (OECD and ILO).
The criteria are fine-tuned and detailed by the technical screening criteria defined by the delegated acts.
The Taxonomy has a direct and an indirect scope. Based on the direct scope, we can mention that it addresses –for the time being– environmental sustainability.
Financial services providers (i.e. banks), financial services member state regulators, investment firms and large companies have to report on how big portion of their portfolio is taxonomy compliant. The indirect scope is captured through market pressure.
In order to be able to define this portion, shipping companies will be required to provide this information towards their banks and investors, even if the reporting and the disclosure requirements are not obligatory for them.
It is essential that investors have information on what they can consider sustainable.
Sustainability and politics
A.B According to the current technical screening criteria, if the vessel transports fossil fuel, no matter how green the vessel is, it would not qualify as green investment. How do we handle this? Does this rule exclude the entire tanker fleet?
K.B This is a political decision which needs explanation. In principle, yes, the aim of the regulator was to penalize fossil fuels at any level. However, we must take into account the fact that transition is a necessary in-between step before becoming fully sustainable. Addressing those market players who actually can have an impact on the given economic activity is key. This has been partly recognized at technical level, but the process is highly politicized. The wording “dedicated to” needs further interpretation and might provide the possibility to include tankers. For example, if a tanker, which would be defined as green vessel based on its operation, and if in principle can be also be used for transporting sustainable fuel, once market demand and supply require, should not be excluded from taxonomy compliance.
A.B What are, in your view, the implications at the international level? Isn’t it a dangerous path for the EU to dictate unilaterally the taxonomy standards? Are the Chinese, Japanese and other competitors of the EU fleet subject to the same conditions? Do you see other jurisdictions following the EU policymakers?
K.B Due to the negative consequences of regulatory fragmentation, which we all know, a regional legislation should be avoided for a global industry like shipping. The EU –through international cooperation– should devise the criteria to safeguard an international level playing field. And the EU regulators are following this path in the field of sustainable finance on different levels: for example, the EU co-chairs with China the International Platform of Sustainable Finance but there are other EU-driven international initiatives as well, for example at central bank level. More and more jurisdictions are looking at similar solutions as the EU taxonomy. Chile, Japan, etc. Of course, a lot will depend on how the taxonomy will be put in use.
———————————————————————————————————————————————–The full interview is published in the November/December 2021 of Greek Business File, available here.