The EU is currently finalising a “taxonomy” aimed at shifting financial flows towards sustainable assets. However, Germany is leading a group of countries trying to muddy the waters by removing the disclosure requirement, writes Sébastien Godinot.
Sébastien Godinot is an economist at the WWF European Policy Office
Last week, investors with $34 trillion in assets called on governments to put more ambitious climate policies in place.
Investors are increasingly climate-aware. Many are getting out of fossil fuels and seeking ‘ethical assets’, whether that be to help manage risk, to promote positive change, or to boost their reputation.
However, the climate emergency and the collapsing ecosystem necessitate faster and further-reaching positive change. Time is running out to avoid catastrophe, scientists tell us.
We need a massive sea-change in our economy. Only around 5% of the EU economy is based on activities that are climate-friendly or fully sustainable. We have to shift financial flows from dirty to clean, and pull the plug on all money which funds damaging activities.
According to the European Commission, there is an “investment gap” of €180 billion per year if we want to meet the EU climate target of 40% lower emissions by 2030. Let alone the far greater levels of action required by the Paris Agreement and the Sustainable Development Goals.
But while the oil giants can easily be identified as polluters, and wind or solar energy is known to be carbon-free, much of the economy is far murkier. There is no easy way for an investor to be sure what climate or social impact her or his money will have.
The EU is working to address this gap. It is finalising a rating system, known as a ‘taxonomy’, which would classify activities on the basis of their sustainability.
Imagine an EU Energy Efficiency-type label, like you’d get on a fridge, but for the whole economy. Telling you, at a glance, if that activity is green, less green, or harmful to the environment.
It’s a great idea. However, despite the robust technical work the European Commission carried out on the taxonomy, its initial proposal, which is now being discussed by the Member States in Council, does not go far enough. It covers only the part of the economy that could be rated “green”. This means it would miss that whacking great 95% of ‘not fully green’ activities. They would be lumped together as “other”, maintaining the confusion on their environmental impacts.
For the taxonomy to have a meaningful impact, it should cover the entire economy, rating each economic activity from green to red according to its sustainability – just like the successful and user-friendly EU Energy Efficiency label. This ‘full’ taxonomy is supported by France in the EU Council.
To have traction, this rating must be publicly available – known as ‘disclosure’. It must not only rate economic activities but also the financial products that fund them.
However, Germany is leading a group of countries trying to muddy the waters by removing the disclosure requirement.
It’s as though Germany and others wanted to create an EU Energy Efficiency label… and then to hide it under the fridge, so it couldn’t help anyone.
The sustainability rating must be economy-wide AND publicly available to have a real impact. Without disclosure, the robust technical work, the years of discussions, the months of negotiations will have been for very little: a case of much ado about nothing.
Finding an ambitious agreement will be a first test of the new Finnish EU presidency’s green credentials, as Member State representatives meet on the taxonomy on 3 July.
If the Council gets it right and endorses a full and transparent taxonomy, it would help take the shift from dirty investments to clean ones to a whole new level.
This would lead to a boost in climate-friendly sectors, which in turn could bring a massive reduction in emissions, moving the EU closer to the Paris climate agreement goals. It would increase local jobs and improve EU citizens’ quality of life by reducing pollution.
What’s more, it would make the EU into a global leader, shoring up its claims of being a champion of sustainable finance and setting the way for other countries.
The benefits of a full and transparent taxonomy are clear. The Finnish EU presidency and the Member States must now make it happen.