A few days before Christmas 2021, the European Commission (EC) published a supplement to the EU Taxonomy (complementary delegated act). In short, the supplement incorporates amendments proposed by France and Germany, creating specific rules for nuclear energy (French interests) and natural gas (German interests) – designating both of the aforementioned energy sources as green.
An expert group had previously concluded that nuclear energy, despite being a low-carbon energy source, does not meet the “do no significant harm” criteria due to nuclear waste. The same experts concluded that natural gas does not in any way meet the ecological threshold values set in the Paris Climate Agreement. Despite this, the European Commission approved the aforementioned supplements. Now, the issue will be considered in the European Parliament.
As is known, the Taxonomy was intended as an informative tool to find and build a common language and understanding among market participants. The understanding of what is green can vary, and even varies significantly. But, at the very least, the Taxonomy would provide a clear basis for what to judge and how. It would not be an exaggeration to say that the Taxonomy will become a political-financial and industrial instrument of influence, for instance, by determining tax relief for activities compliant with the Taxonomy.
The EU Taxonomy is only the beginning
The EU Taxonomy is a political intervention. It appears the British taxonomy will be similar.
Inevitably, the Taxonomy will become a bone of contention for European Union countries and an object of various trade-offs. The reaction from sustainable finance institutions was unexpectedly quiet.
Sustainable finance means two things: first, how to incorporate sustainability into financial investments; second, how to maximise the real-world sustainability impact of investments. The Taxonomy will primarily help in the first case.
As political developments around the EU Taxonomy rules create a snowball effect, sustainable investors are forced to watch from the sidelines.
For sustainable investors, the Taxonomy is an important tool and set of guidelines at the same time – an investor is not an expert, for example, on the issue of exhaust gases from private vehicles or the accounting of CO2 emissions in cement production. But an investor, when evaluating an investment, can refer to the Taxonomy. Lobbying efforts to support certain sectors are incomparable to the overwhelming activity and influence of the nuclear and gas sector lobbies we have witnessed. From this, we can conclude that for sustainable finance to be significant, it will, in any case, be political. The EC document examined in this article is only the beginning. We see the same situation slowly developing in the USA as well.
The EU Taxonomy is a step towards change because financial, industrial and fiscal policies are colliding. The Taxonomy is, as it were, a mirror to the EU Fit for 55 strategy. For the first time, European policymakers have looked into this mirror. Who will win and who will lose will be a political explanation.
We will have to use the Taxonomy fairly soon. Unfortunately, it is once again full of regulatory requirements. Despite recent changes to its principles, the taxonomy is a significant step forward. Further work must be done on processes related to the Taxonomy.
However, it is clear that the EC delegated act shows the weak point of sustainable finance. In recent years, investors no longer feel uncomfortable when politicians get involved in the process, although this mostly concerns technical executors and ministry representatives, rather than the politicians themselves.
In the coming months, there is an opportunity to collaborate with Members of the European Parliament regarding the Taxonomy. In the investor environment, this is necessary. Otherwise – whether we like it or not – the future of sustainable finance will be distinctly political.