21 4.2. The articulation of corporate targets and transition plans with the EU extended environmental taxonomy The EU Platform on Sustainable Finance, a permanent expert group of the Commission, was mandated by the Commission to issue a report on the extended taxonomy. Its final report on the issue was published in March 2022: ‘ The Extended Environmental Taxonomy: Final Report on Taxonomy extension options supporting a sustainable transition” . The report’s summary states: “ The Platform considers the balance of arguments to be in favour of an extended environmental Taxonomy , which would introduce greater transparency and clarity for investors and ensure market practices are aligned across the EU. In fact, the current Taxonomy already defines different performance levels and allows financial market participants and institutions to apply them voluntarily. However, it does not clearly label these levels or make them easily applicable by markets and other financial actors. ” The Platform is recommending extending the Taxonomy framework to classify activities in 3+1 categories, as shown in the figure below: • “ Unsustainable performance requiring an urgent transition to avoid significant harm: These are activities that need to be improved urgently and could qualify for Taxonomy-recognised investment as part of a transition plan to avoid their current significantly harmful performance and move to intermediate performance levels. • Intermediate (or Amber) performance: These are activities that operate between significantly harmful and substantial contribution performance levels and could qualify for Taxonomy-recognised investment as part of an intermediate/amber transition plan under which they continue to improve to stay out of significantly harmful performance. • Unsustainable, significantly harmful performance where urgent, managed exit/ decommissioning is required: These are activities that cannot be improved to avoid significant harm and will therefore remain always significantly harmful (ASH) and should be prioritised for Taxonomy-recognised transition investment as part of a decommissioning plan with a Just Transition effort. • Low environmental impact (LEnvI) activities: These are activities that do not have a significant environmental impact and should not be regarded as either red, amber or green. (...) This classification should also encourage ‘LEnvI enterprises’ to access green Taxonomy-aligned finance for their green investments and expenditures.” The extended Taxonomy is critical to accelerate a comprehensive transition of the economy and substantially clarify what transition finance is, as the environmental Taxonomy, while necessary, is too niche. The extended Taxonomy will yield the major benefit of clarifying the different transition steps towards full sustainability in a given economic sector, which will unavoidably include and incentivise many more companies than a green Taxonomy alone. More specifically, two elements will be clarified and accelerated with an extended taxonomy: (1) the intermediate transition from the red to the amber category, where it is not feasible to immediately transition to the green category; (2) the end of capex for new harmful assets and the gradual decommissioning of existing harmful assets in the case they cannot be retrofitted to become green in a timely way. Figure 4. Simplified graphic showing how the extended environmental Taxonomy fits across the whole economy Using the extended Taxonomy to inform corporate targets and transition plans A major added value of the EU Taxonomy is that it brings more granularity (including thresholds), at economic activity level, than the CSRD or other EU disclosure regulations. In addition, its criteria must be science-based, according to the Taxonomy Regulation (Article 19) 45 . The EU Taxonomy will provide information on those activities of the company that are taxonomy-aligned or not, for the sectors covered by Taxonomy criteria. This information is important for the company to create its entity- level transition plan: it can decide, for example, to direct its new investments only into activities that are compliant with the taxonomy’s criteria (the Taxonomy thus influences the company’s Capital Expenditure plan). The company could also use the Taxonomy to assess its existing investments and to outline how and when those which are not aligned with the Taxonomy will become so and how it will decommission those activities which cannot be aligned with the Taxonomy. The Platform also recommends using ‘activity- specific intermediate capex plan’ 46 in order for the company to explain how an activity-specific investment plan will qualify for intermediate/amber capex. The EU Taxonomy can also be used by the company to set targets, to e.g. increase its green Taxonomy alignment or decrease its Taxonomy misalignment/its exposure to the harmful category of the Taxonomy by a given year. For WWF, the extended Taxonomy can and should become a critical tool for companies to clarify their transition at the granular activity level. The Platform recommends a first voluntary step to test the extended Taxonomy framework 47 . Once this is done, the Platform recommends a revision of the Taxonomy Regulation to properly integrate the extended Taxonomy. At this stage, it will be relevant to update the ESRS to ensure consistency with the revised Taxonomy framework. WWF is developing a specific briefing on the EU extended environmental Taxonomy that will be published at the begining of 2023. 4.3. Five steps to build a complete EU framework on corporate targets and transition plans 45 However, this requirement is unfortunately not met for specific, politically-sensitive sectors like gas-fired plants and nuclear power plants, which worryingly weakens the credibility of the whole framework. This must be urgently fixed. See https://www.wwf.eu/?7581466/EU-Taxonomy-Environmental-groups-start-legal-action-against-sustainable-gas-classification. 46 Section 5.7 of the Platform’s report. 47 Recommendation 7 of the Platform’s report. 48 “(14) The growing gap between users’ information needs and the current reporting practices of undertakings makes it more likely that individual Member States will introduce increasingly divergent national rules or standards. Different reporting requirements in different Member States would create additional costs and complexity for undertakings operating across borders and therefore undermine the single market, and would undermine the right of establishment and the free movement of capital across the Union. Those different reporting requirements also make reported information less comparable across borders, undermining the capital markets union.” 49 CSRD recital (26): (about undertakings) “They should also be required to disclose any plans they may have to ensure that their business model and strategy are compatible with the transition to a sustainable economy and with the objectives of limiting global warming to 1,5 °C in line with the Paris Agreement and achieving climate neutrality by 2050 (...)”. We underline. To build a complete EU framework on corporate targets and transition plans, we recommend the five following steps: Step 1 Ensure mandatory standardised disclosure of targets and transition plans Step 2 Articulate site-level, economic activity-level and company-level targets and transition plans Step 3 Build EU 1.5°C sectoral decarbonisation pathways as benchmarks Step 4 Assess the consistency of targets and transition plans Step 5 Ensure remediation and penalties where necessary Step 1. Ensure mandatory standardised disclosure of targets and transition plans As seen in Section 1.4 above, the CSRD empowers the Commission to adopt Delegated Acts creating the ESRS, which is a major opportunity to establish a granular, comparable template for corporate targets and transition plans. Such standardisation is crucial for several reasons: to ensure a level playing field for companies, provide comparability across comparable companies, bring legal certainty to companies for easing their compliance with several EU laws related to targets and plans, reduce administrative burden and costs of reporting, and avoid the fragmentation of the EU single market. These reasons are made very clear in the CSRD itself in the Recital 14 48 . However, the CSRD suffers a major flaw: its ‘comply or explain’ clause. If a given company has no target or transition plan to disclose yet, it is allowed to merely explain why it does not have such a plan. There is no requirement for the company to set up a plan and publish it 49 . In fact, a number of companies have recently told WWF that CSRD is ‘voluntary’. This flaw can and should be fixed with the other above-mentioned EU laws (CSDDD, CRD, Solvency II, EU GBS and Benchmark), requiring companies to set targets and transition plans. While they have different scopes and objectives, we consider that the requirement to set targets and transition plans as structured in the CSRD and ESRS is relevant in each of them, to ensure consistency. Once such targets and plans are set, companies will then be required to publish them under the CSRD, fixing ‘comply or explain’ flaw. Specifically, the Benchmark Regulation itself is not currently