It must mean the end for greenwashing by financial institutions, and making green financial choices easier: the European taxonomy. This classification system determines what is a sustainable investment and what is not.
The new system will be introduced step by step in the coming years. Using it, investors, regulators and other stakeholders should be able to immediately see whether a company is investing in a sustainable future or not. Then they can make more informed investment choices and more money will flow into sustainable loans. At least that is the intention of the European Commission.
Still not very enlightening
But now that the first steps towards implementation are being taken, the European taxonomy does not seem to clarify much. While there is still a dispute about what can be given a green label – is nuclear energy green, or gas? – financial institutions are already working on the practical application of the rules. From the 2021 financial year, they must map out which loans they have provided fall under the taxonomy. This does not determine whether the loan portfolio is really green; about this green asset ratio (GAR) Europe’s 150 largest banks will not have to report until 2024.
Research carried out by the consultancy and accountancy firm PwC into the first reports from seventeen banks in the Netherlands, Germany and France, for 2021, shows that this phase is already causing problems. The financial institutions, whose names have not been disclosed, turned out to have interpreted very differently which loans fall under the taxonomy rules on the basis of the same European rules. This makes their results difficult to compare.
According to one of the PwC researchers, Ruben Bongers, comparing the reports was “extremely complicated”. He finds it remarkable: “Given the importance of the subject, you can expect that the regulations are just good and unambiguous. Also in a start-up phase.”
According to Kees-Jan de Vries, who works as a partner at PwC on sustainability rules for companies, it is clear that the European taxonomy rules have arisen under enormous political pressure. “They seem to have been made with some haste.” The rules were only published in April and June 2021, when the ‘financial year’ was already over. Clarification on it, in a number of question-and-answer documents (FAQs), came in December and early 2022, when the involved institutions were already busy preparing the annual report. According to PwC, those FAQs also contained contradictions.
no ill will
“That broad interpretation of the rules therefore does not seem to us to be bad will on the part of the banks,” says De Vries in a video conversation. Nevertheless: “It’s not that banks want to pretend to be greener than they are, but what has now been published is shooting in all directions.”
The fact that the rules have been interpreted differently may also mean that there will be no mutually comparable ones from 2023 green asset are ratios. If one bank has not checked whether certain loans are green, and another bank has checked for similar loans, the ratios of those banks may incorrectly differ. That could become a problem if investors and regulators make decisions based on those ratios, the PwC researchers warn.
According to the consultancy, it would be good if the European Union still makes clear for the current reporting year what exactly the banks should group under the taxonomy, so that better comparisons are possible in the future. De Vries and Bongers also call on the banking sector itself to provide clarity. Bongers: “As market parties, you can make mutual agreements about exactly how to interpret the rules.”
The Dutch Banking Association (NVB) embraces PwC’s appeal. “There is indeed a need for cooperation. As banks, we also have to ask for more guidance asked to the European Commission,” says Maryse Hazelzet, sustainability adviser to the banking umbrella. She agrees that it would be good if, at least in the Netherlands, there was more agreement about what should be taken into account for a good SRB. “But it is also logical that there are growing spurts now. The European rules are complex, and it is also unclear whether or not you can apply Dutch rules about what is sustainable – such as the building decree – in the taxonomy.”
If all banks will work identically for the green asset ratio and making that score public can still make comparisons complicated, warn PwC and NVB. This is partly because the rules for a green label will be expanded in the coming years. For example, mortgage loans granted must already be labeled, but loans to agriculture are not yet. As a result, the figure for De Volksbank (many mortgages) will say more about the ‘greenness’ of the bank than the figure for Rabobank, which has many agricultural loans on its balance sheet.
From green to brown
In addition, the rules for green loans are becoming stricter. You can compare this with the sustainability labels for refrigerators, for example. The refrigerator that used to score an A, now only gets an F due to technical progress. A bank that has a good GAR next year will have to continue to make further greening to prevent it from turning ‘brown’ in the long run.
Loans to parties outside the EU are not (yet) included in the assessment. A bank with green loans within the Union, but gas and oil loans outside of it, can still look very green if you just look at the GAR.
The question is what the GAR will say from next year. According to the PwC researchers, a good step has in any case been taken to map out how green individual banks are. You just have to be careful with comparing. “You can’t just put percentages next to each other and conclude that one bank is green and the other is not,” says Bongers.
A version of this article also appeared in the newspaper of 1 July 2022