Sydney — The EU’s attempt to protect the environment by developing a complicated, wide-ranging definition of green investments has run into yet more problems. This time, it is opposition from those who support a more incremental approach.

A new draft of the bloc’s sustainable finance taxonomy, which seeks to catalogue only activities aligned with climate protection, includes some forms of unabated natural gas generation. The addition of a fossil fuel to the list predictably drew protests from academics, non-governmental organisations and some investors. More than 200 of them signed a letter objecting to the change.

The move appeared to be a concession to industry and government lobbying from gas-reliant countries, particularly in Central and Eastern Europe. Meanwhile, some of the most high-profile figures in sustainable finance responded to the uproar by criticising the taxonomy for being too strict to be effective.

The two groups have somewhat different concerns. The fossil fuel industry does not want their access to capital diminished. Finance executives are worried that it will be difficult to meet the booming demand for green investment products when only a fraction of assets would fall under the taxonomy.

Here is a typical argument from those who worry about losing profits from fossil fuels. Anna Michelle Asimakopoulou, a conservative-aligned European parliament member from Greece, wrote in January that the taxonomy would damage energy-intensive industries such as aluminium as companies would most likely be required to comply to access public funding.

As for the financial sector, the complaint is often that setting too-high standards is unrealistic. UBS chair of sustainable finance Huw van Steenis wrote in Bloomberg Opinion that only including the “purest shade of green” would exclude most bonds, and urged that the taxonomy should include other “shades”. Mark Carney, the UN’s special envoy on climate and finance, echoed the argument at a Financial Times conference.

It’s hardly surprising that only a small fraction of economic activities nowadays would pass a rigorous, science-based assessment for safety and sustainability

Both objections misunderstand the taxonomy’s purpose, which is to set a high bar based on what scientists have calculated is needed to avoid the worst effects of climate change. Instead of assessing sectors or companies as they are now, the taxonomy identifies, at a granular level, what forms of activities such as energy generation, building construction, and manufacturing will lead to a safer planet.

This sets it apart from other frameworks, such as the Taskforce on Climate-Related Financial Disclosures (TCFD), which seek to identify risks arising from climate change. (Michael Bloomberg, founder of Bloomberg, is the chair of the TCFD.) Or the sustainability reporting project being developed by the IFRS Foundation, which hosts accounting standards used worldwide. It is also very different from commercial sustainability ratings systems, which often provide a best-in-breed selection — the companies with, for example, the lowest emissions or best disclosure in their sector.

These approaches all seek to make incremental improvements to finance and industry as they now are, rather than benchmarking them against where they should be if the whole world is to keep temperatures from rising more than 1.5°C from pre-industrial levels.

Our current level of emissions would render much of the planet uninhabitable if it continues unchecked for decades. It is hardly surprising that only a small fraction of economic activities nowadays would pass a rigorous, science-based assessment for safety and sustainability.

Eurosif, a Brussels-based non-profit that advocates for sustainable investment in Europe, sums up the issue: “The real problem is not the taxonomy, but the fact that according to estimates by McKinsey, about 50% of the investments in Europe required to meet net-zero by 2050 are not profitable in the current policy environment.”

Intense lobbying

Critics also miss that the taxonomy is not meant to be universally applied from the first day. Fights over the percentage of taxonomy-aligned assets in investment products and European Green Deal funding are inevitable, but these can be separate from the taxonomy itself.

This is already happening. For example, there has been intense lobbying from big asset managers over the planned EU “Ecolabel” for retail investment products. The latest draft makes many concessions for this. Getting an Ecolabel would possibly only require half of the assets in a fund to be green, and that greenness can include “investing in their transition towards taxonomy compliant activities”.

That would be allow more firms to clear the bar, but if the definitions underlying all EU “green” measures are too loose, it will undermine every other effort, from fiscal policy to financial regulation, that build on them. No amount of political bargaining will fix that.

What is more likely is that standards from abroad will prevail. Other countries are developing taxonomies. That includes the UK, which is looking for post-Brexit ballast to its financial sector and plans to build on the final EU list. If Europe’s taxonomy ends up being a weak political compromise, it will undercut the bloc’s well-earned climate leadership.



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