By Jon Rhodes and Raphaël Delli
In many ways the financial sector has led the European ‘green’ agenda in the past few years. Whilst policy makers have been drawing up new guidelines and targets for industry, hundreds of billions of euros have been raised for green investments, and since 2018, the European Commission’s Financial Services Directorate (DG FISMA) has been working on an action plan – the EU Taxonomy.
In a nutshell, the Taxonomy is the classification for what is, and what isn’t, counted as ‘green’ or ‘sustainable’. The first chapter of this classification, dealing with environmental activities and specifically focused on whether such activities meet two climate change objectives, is due to come into force in January.
But like most things in Brussels the journey from conception to adoption hasn’t come without controversy. The rules, in the form of a Delegated Act, are currently held up in the European Parliament and Council amid an increasingly heated debate about whether nuclear and natural gas can and should be accepted as ‘sustainable energy sources’, even if only on a transitional basis.
This, however, isn’t the only hurdle for the Taxonomy. The financial sector may have taken a lead on sustainability, but everyone else is catching up fast, and in many cases, eager to run ahead. If the Taxonomy can’t fall into line with the EU’s hugely ambitious Fit for 55 package and with the myriad of new targets and ambitions coming out of COP26, it could end up being a white elephant.
For a start, the Taxonomy regulation, which entered into force last year and well before the publication of the Fit for 55 (‘Green Deal’) proposals were published in July, had to anticipate the goals and means for transition, meaning that in practice despite months of deliberation and argument it might not end up channelling finance in the right direction.
If the Taxonomy fails to designate an economic activity as ‘green’ today, that investors would back as part of the transition to reach the targets that will be set by Fit for 55 tomorrow, conflict between the two initiatives is unavoidable.
This is the main issue. The EU Taxonomy in its current form cannot cope with the complexities of transition. An investor wanting to back a car maker that is converting to electric vehicle production needs a framework that recognises transitional activity and capital spend. A binary taxonomy, that can only provide an ‘all clear’ once the end state is reached, won’t help. You can’t expect a bank or asset manager to wait five years before it finds out whether or not the asset it has lent to or invested in can be regarded as sustainable.
The good news is that EU policymakers recognise that their ambitions for climate change and for the green transition cannot succeed without huge growth in sustainable finance. And – as far as we understand – they have begun work on alignment with the Fit for 55 programme and introducing more flexibility around transition. They are willing to listen, and they are willing to engage.