Clarity and an end to arbitrariness. Investors looking for a green investment have lost their way in a jungle of labels in recent years, and now the so-called European ‘taxonomy’ would finally put an end to this. With an objective, scientifically sound ‘green gold standard’, the European Commission would determine what the label ‘sustainable investment’ may be attached to. This stamp should be put into use in 2023.
But now that that European green investment guide is nearing completion, little is left of the promised clarity. This Wednesday, the Commission will present its proposal to include gas and nuclear energy in the taxonomy. This means that an investment in a new nuclear or gas power plant may be qualified as ‘green’ under certain conditions. But that plan has been criticized so much in recent times that it is very questionable how much the new standard will be used in practice.
In recent months, a fierce battle broke out in the EU between member states over gas and nuclear energy, in which France and Germany, among others, came face-to-face. Member States fear that it will be more difficult to obtain private money for the energy form they want to invest in in the coming period if it is not included in the green standard. A taxonomy in which nuclear energy is not given a place is therefore unthinkable for Paris, while Berlin radically rejects this form of energy. At the same time, Germany wants investing in gas-fired power stations to become ‘sustainable’, while several countries, including the Netherlands and Spain, have strongly opposed this in recent weeks.
Even an advisory board of experts from the science and energy sector set up by the Commission itself rejected the proposal for the ‘misleading claims about the environmental performance of economic activities and financial products’. The Commission defends itself with the argument that both forms of energy are necessary for the time being in the ‘transition’ to a climate-neutral Europe and that they should therefore be able to receive a green label under certain conditions.
Also read this article: The definition of ‘green’ leads to fierce debate in Brussels
mud fight
Despite all the criticism, the proposal will most likely not be blocked – after all, that would require a ‘super majority’ of 20 (out of 27) member states. But analysts predict that the mud fight will result in a watery compromise whose value is ultimately questionable. Especially because the fierce criticism also came from less obvious sources: the financial world, which should actually embrace the standard.
So a disapproving appeared open letter from the Institutional Investors Group on Climate Change, a consortium of 370 major investors including BlackRock, Vanguard and several Dutch pension funds – worth a total of $50,000 billion. „At a time when we need clarity, the uptake of gas [in de groene taxonomie] sets a useless precedent and is clouding the waters for investors who want to do the right thing,” said director Stephanie Pfeifer in the letter.
Also a tour of Reuters news agency showed that several large fund managers are highly critical of the Commission’s intention to include certain forms of gas and nuclear energy in the taxonomy. “Whether or not they do, we wouldn’t consider that ‘green’ ourselves,” said Gemma Corrigan of the Federated Hermes fund, which manages more than $600 billion.
In this way, the credibility of the taxonomy crumbles, even before it has been properly introduced. The criticism of the funds does not surprise Simone Tagliapietra, climate analyst at the Brussels think tank Bruegel. “Investors are looking for clarity above all else. They follow all the discussions and disagreements, see that the standard is being watered down and think: why should we still use this?”
No prohibition
According to Tagliapietra, two different discussions in Brussels have become mixed up when preparing the taxonomy. “On the one hand, about what may be a sustainable investment, and on the other, about which energy Member States in the EU are allowed and willing to use in the coming period. But the taxonomy says nothing about the latter: it does not mean a ban on investments in polluting sectors. It is expected that private financing will eventually become easier to collect with a green label. But that will only be the case if the taxonomy is actually seen as solid, and that is now becoming increasingly unlikely.”
All the more so because the European Investment Bank (EIB), which is to function as a ‘climate bank’ for the EU, is also critical. Chairman Werner Hoyer spoke remarkably harshly against the inclusion of nuclear energy and gas in a press conference last week. The ‘technically very complex’ conditions that the Commission has drawn up for a green label for gas-fired plants would, according to Hoyer, make investors ‘sleepy’. “The idea of the taxonomy (…) is to assure investors that they are getting what the label says,” Hoyer said. “If we lose investor confidence by selling something like a green project that turns out to be the opposite, we’re going to cut ourselves.”
“Eventually, the markets will decide for themselves what they do,” predicts Karel Lannoo, chairman of the Brussels think tank CEPS. “They then look for data themselves about which investment does or does not carry a risk for the energy transition.” He finds it worrisome that the discussion about what should be an objective standard has derailed so much. “The Commission has become increasingly politicized and that is now taking its revenge. She should be able to decide independently on these kinds of standards, but that turns out to be impossible.”
After all, the interests of Member States and the financial sector differ widely, Tagliapietra emphasizes. “An asset manager like BlackRock is on the long term and just wants a clear, unambiguous set of definitions to show to its investors. In the Member States, politicians are mainly concerned with the short term, promoting the technology they want to be able to use in the coming years.”
The result is a standard that ultimately no one is happy with. The Spanish government has already suggested using its own taxonomy if gas and nuclear energy are included in the European variant. ‘A missed opportunity for the EU’, says Tagliapietra, ‘in an area of soft power where she could have taken on an influential role.”
A version of this article also appeared in NRC on the morning of February 2, 2022