Meeting the climate target requires rapid realignment and mobilisation of finance at a massive scale. To avoid greenwashing, the EU’s sustainable finance taxonomy needs to establish screening criteria, rooted in science and linked to the metrics of climate change, writes Peter Sweatman.
Peter Sweatman is CEO of Climate Strategy & Partners, a consulting firm.
Pioneering Swedish botanist Carl Linnaeus (1707-78), “the father of the modern taxonomy”, said that an economist without knowledge of nature was like a physicist without knowledge of mathematics.
A taxonomy is a scientific classification tool, and the EU Taxonomy provides the new rules for sustainable finance in Europe to assist investors, companies, issuers and project promoters transition towards a low-carbon, resilient and resource-efficient economy.
Therefore, and to avoid greenwashing, the European Commission needs to establish screening criteria in the EU Taxonomy that are rooted in science, and connected to the mathematics and metrics of climate change.
Meeting climate goals requires the rapid realignment and mobilisation of finance at a massive scale. A robust EU Taxonomy will channel funds to deliver genuinely sustainable investments.
It will also protect the savings of Europe’s citizens against future climate risks, and help pension funds avoid stranded assets – the pipelines, plant and machines whose high emissions will curtail their economic lives.
The immediate goal of the EU Taxonomy is to identify investments that make a substantial contribution to climate change mitigation, or adaptation, and avoid harming other environmental objectives.
Until 18 December, the Commission is consulting on its proposed screening criteria, and in a briefing, we highlight the strengths of the Commission’s draft, and call for improvement in five areas:
- Life-cycle emissions of green power generation must be kept below 100g CO2e/kWh and reduce on a trajectory to deliver net-zero emissions by 2050. This threshold will promote renewables and exclude all fossil fuels from sustainable investment portfolios.
- Only advanced feedstocks should be used for bioenergy and biofuels. This will ensure that sustainable investments also consider the upstream land-use impacts related to bioenergy feedstock production.
- Farms should consider emissions reduction trajectories and converting carbon-rich soil to forest is counterproductive. Taken together, this will encourage all landowners and managers to be more directly engaged in sustainable management and mitigation activities.
- Expert recommendations need to be reinstated for hydrogen, heat-pump and ammonia production; single-use plastics must be capped; and refuse-derived fuel (RDF) combustion excluded from sustainable cement production. The Commission’s Technical Expert Group made science-based recommendations in all of these areas, which should be included in the Commission’s final Act.
- Adaptation investments should be ring-fenced in financial reports, and the flexibility required for good adaptation practices should not be used as a “green loophole” for lower mitigation criteria. Clearly, adapting a high-emissions asset to future weather patterns is insufficient to deliver Europe’s energy transition.
Further technical inputs from the Sustainable Finance Platform is needed in categories where scientific evidence is missing, like shipping and livestock.
While this work is undertaken, the precautionary principle suggests that screening criteria should not be adopted for activities where progress to date is insufficient.
In a perfect world, the EU Taxonomy would contain screening criteria that automatically aligns with our improving understanding of the mathematics of the Paris Agreement.
As parties increase their climate ambition (as the EU will for 2030), and with the US pledging “back in”, any thresholds set today will need frequent review.
Europe is leading the world in the development of the language of sustainable finance. Its credibility comes from the work of hundreds of experts who have been working for years to develop a set of science-based taxonomy recommendations.
The Commission has this opportunity to showcase the integrity of its processes, and launch an EU Taxonomy that fully backs the vision of its Green Deal.
As Professor Linnaeus said over two centuries ago, “Nature’s economy shall be the base of our own” and a scientific EU Taxonomy can make that connection.