The EU taxonomy, a system for identifying what economic activities count as sustainable, has been in the spotlight since the news broke on new year’s eve about a proposal from the European Commission to extend it to cover nuclear energy and natural gas. It is unclear how long the controversy will last.
One the one hand, there does not look to be enough opposition among member states or members of the European Parliament to be able to block it, although the Council and Parliament have four months, plus potentially an extra two, for scrutiny.
On the other hand, there is the prospect of a legal challenge from Austria and Luxembourg. At the time of writing in late January it was also unclear how the Commission would be responding to feedback from the Platform On Sustainable Finance, its advisory body, that the Commission’s proposal is not in line with the bloc’s legislative bodies’ own rules on the taxonomy.
There is also the matter of the Platform’s recommendations, due soon, on an environmental transition taxonomy and the Commission’s response to that. So, one way or another it could all work out. Maybe.
Analysts at Natixis say they expect the delegated act to be adopted and that they do not believe the taxonomy’s influence will vanish if nuclear and gas are included – “the current compromise is politically sound and scientifically tolerable in its foreseeable effects”, they say.
Contrast this with an open letter from the Institutional Investors Group on Climate Change, warning that the Commission’s proposals would “seriously compromise Europe’s status as a global leader in sustainable finance”.
Whatever the outcome, the current situation of disagreement among member states, and other stakeholders, feels sadly unsurprising. As one consultant observed, without a more nuanced taxonomy design that goes beyond defining what is green and hence what is not, “you end up with impossible gaps to bridge, a block of the whole scheme, and EU sceptics/outsiders laughing”.
Or as the CEO of a real estate investment trust said, as long as the taxonomy is seen as defining what is green and what is not “you are embedding greenwash in the discussion”.
In 2019, Ben Caldecott of the Oxford Sustainable Finance Group named 10 reasons why the then current proposals for a green taxonomy were a bad idea.
Number four was “disingenuous claims that the taxonomy won’t become a standard or mandatory”. Another was that lobbying would result from thresholds for the binary green/not green assessments being set administratively.
Caldecott stands by those views and thinks a lot of the issues he raised are coming to pass.
“At best, a green taxonomy is one helpful tool among many for some use cases,” he says. “By far the most important use case actually has very little to do with finance and investing, but rather fiscal policy. If governments want to support ‘green’ things, they need to define what is green.”
Disagreements over the taxonomy are only one aspect of an incredibly complex package of sustainable finance regulations in the EU. One can’t help but wonder if there isn’t a more effective, less Kafkaesque route.
Susanna Rust, Deputy News Editor
susanna.rust@ipe.com
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