Understanding the impact of new EU investment rules – POLITICO
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The list of green investments proposed by the European Commission has sparked months of battles – now comes the time to see if it was worth it.
On Wednesday, the Commission presented a second list of technologies that meet the standards for inclusion in the Taxonomy Regulation – the green investment rules that are meant to send a clear signal to retail investors, fund managers and bond issuers on the types of schemes that can rightfully be called green.
This latest list included nuclear and natural gas – covered by numerous conditions – which outraged many campaigners and triggered warnings of legal action from some member countries.
Last year the Commission presented another, less controversial list, covering technologies like wind and solar. Next comes a list of environmental goals like water, biodiversity and the circular economy.
But does it really matter?
In its boldest form, the taxonomy can redirect financial capital flows into real green investments. Otherwise, it is just a list that, through political artifice, will simply be ignored.
Here are two reasons why the fuss is warranted. And two reasons why this is not the case.
Finance will have to jump through the hoops of taxonomy
This year, thousands of large EU-based companies, as well as banks, insurers and fund managers, will for the first time disclose how the investments and products they claim to be sustainable compare to a common standard. of green definitions.
“The taxonomy has a big gig – it’s a common language, which has yet to be disclosed,” said Sean Kidney, CEO of the Climate Bonds Initiative think tank and member of the Commission’s advisory platform on sustainable finance.
“Every country, every government, every bank has a different approach [sustainability] “, Kidney said. “So Barclay’s is offering something, and Unicredit is offering something, and you can kind of compare … but they hire their own consultants, they write different methodologies.”
“How are they approved, who knows? Who can tell? Someone is paying a fortune to try to analyze them,” he added.
Even though banks, insurers and fund managers may not agree with all the definitions in the EU list, they cannot afford to ignore the standard altogether since their own performance will be assessed by relation to it. And it’s in their interest to make their “green ratios” of taxonomy-aligned holdings as high as possible.
In years to come, it will serve not just as a barometer for green products, but as an indicator of how green entire companies are – and it will be public information.
A common standard makes it easier for people to choose green investments and compare them across financial institutions. It will also be easier for consumers to vote with their wallet if they don’t like what they see.
Taxonomy or not, the green investment wave is real
Global awareness of the climate crisis has fueled enthusiasm for products that claim to help the planet – and financial markets are no different.
This year alone, some $1.35 trillion in sustainable and green bonds will be issued globally, according to a report by Moody’s ESG Solutions. Five years ago, this figure was less than 200 billion dollars.
Financiers know there is money to tap into and are launching products in response.
But a hodgepodge of existing green methodologies has made it very difficult to look under the hood. This means that financial players have been able to label almost anything they want as green.
The taxonomy is supposed to put an end to it by serving as a reference.
There are signs that tougher rules are driving some of the more dubiously defined investments out of the market. From 2018 to 2020, the amount of sustainable assets in Europe fell from $14 trillion to $12 trillion due to a stricter methodology for what can legally be called sustainable investing, the report says. Annual Report of the Global Sustainable Investment Alliance.
But the inclusion of nuclear and gas blew the consensus
Getting investors to trust your best-in-class definitions only works if they agree on what is green.
And the great battle over nuclear power and gas has shattered any consensus.
“The only thing worse than greenwashing by private parties is greenwashing by public entities and by law,” said Thierry Philipponnat, chief economist at Finance Watch, who does not want nuclear or gas are included.
Last week, the head of the European Investment Bank, Werner Hoyer, stated categorically that, whatever the content of the taxonomy, the EIB has “no intention” of ever financing nuclear, and that “for the least we can say, the gas is finished”.
“Smart money will ignore the EU taxonomy if it becomes a political tool influenced by vested interests.” Laurence Tubiana, chief negotiator of the Paris Climate Agreement, warned Wednesday.
There are signs that are already happening: the Institutional Investors Group on Climate Change, which together manages 50 trillion euros, has warned the Commission that the inclusion of gas “hinders our members’ ability to align their portfolios to net zero”.
This opens the door for every investor to use their own different metrics again – but there’s a chance the European version will still work, thanks to a last-minute fudge.
In addition to the normal taxonomy reporting requirements, the Commission on Wednesday added an additional yes/no form to indicate whether nuclear and gas are included in the investment.
This additional screening tool could allow investors otherwise satisfied with the taxonomy definitions to simply ignore products and companies that answered “yes”.
Taxonomy alone cannot change the world
As policymakers pressure the financial sector to redirect investment flows to help the economy go green, there are still not enough sustainable investment opportunities.
“The push on the financial sector is interesting but it has its limits,” said one lobbyist, saying there are not yet ready-made investment streams that tick all the boxes in the taxonomy.
The current definitions are meant to act as a mild positive boost for investors. But if that proves ineffective, there is a more extreme option – environmental advocates argue regulators should go further by hitting banks or insurers with punitive measures for polluting assets.
In the coming months, Commission advisers will propose adding a “red list” to the taxonomy, which would force disclosure of actively harmful or toxic investments.
But that’s another battle.
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