The road to an EU taxonomy (1) has not been a peaceful one. This key piece of the EU Sustainable Finance Strategy is a necessary tool to steer private and public financial flows toward activities that enable the European ecological transition. It generates fear in high-carbon and environmentally harmful industries, whose lobbyists joined forces to weaken the new framework (2). While the first set of delegated acts are almost finalized, the EU Commission reached out to the Platform on Sustainable Finance to ask it to explore changes that could severely undermine the taxonomy framework. This decision is a concession to the advocates of polluting industries that wants people to believe the taxonomy is the bogeyman that will end entire economic sectors.
In January 2021, the EU Commission sent a seemingly harmless letter asking its Platform on Sustainable Finance to provide advice on “the existing and potential use of the EU taxonomy framework for enabling the financing of the transition towards a sustainable economy” by mid-March 2021.
If the headline of this letter does not sound worrying, its content should be carefully examined. Indeed, the EU Commission asks several questions that open the door to a weakening of the taxonomy framework (3). Pretexting the need to increase flexibility and finance the transition of “non-green” sectors, this new procedure could lead to the inclusion of activities currently excluded from it. This risk is clearly visible in the statement released by the chair of the Platform in response to the Commission’s request: “The Taxonomy can also do more to recognise efforts to improve performance and be more inclusive towards economic sectors – including those that have limited emissions, or have limited options to meet the Taxonomy criteria today.”
The Commissions’ decision to study such measures is an almost-direct response to the criticism expressed by opponents to the taxonomy that it would prevent several “non-green” industries to find funding. This criticism can be summarized as followed: some activities are more difficult to “green” and decarbonize (so-called “hard to abate” sectors), the criteria used in the taxonomy are too restrictive for most of these activities, by not including them the taxonomy blocks their transition and is detrimental to their competitivity.
This argument is dangerous. It originates from a misleading interpretation of what the taxonomy is and the will to shield high-carbon sectors from climate concerns. A careful examination of what the taxonomy regulation requires is sufficient to breach it:
1. The EU taxonomy aims at identifying activities that contribute to the transition, not activities that could be less harmful than they are today:
The EU taxonomy is supposed to define under which condition an activity contributes to at least one of the key European environmental objectives without being “significantly harmful” to any other. Therefore, its criteria are selected to reflect when the activity is compatible with the ecological transition, and not when it is simply less harmful than it was before.
Following the logic of taxonomy opponents, activities that will never be green but could slightly improve their carbon footprint – for example fossil fuel production – should be included. This blurs the line between activities that should follow a transition path to become sustainable – something that is well included in the current taxonomy framework (4) – and activities that need to be phased-out or significantly scaled-down.
2. As it is, the EU taxonomy only aims at improving disclosure and reporting:
The EU taxonomy improves disclosure from non-financial companies and financial institutions that commercialize so-called “sustainable” products and foster coherence and transparency in national and European regulations. The taxonomy only requires financial and non-financial companies to report whether, how, and to what extent, their activities align.
For financial products, the taxonomy merely requires for products claiming to have sustainable objectives or characteristics to disclose how they align with its framework and provides ample flexibility to financial institutions. When they fail to adhere fully to the taxonomy, they must report what portion of the investments underlying the financial product do or do not comply with it. Even when such a financial product is not sustainable, it must only be accompanied by the following statement: ‘The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.’
The taxonomy could be used to guide EU and national spending – and notably part of the Covid-19 recovery packages – but this use is not mandatory and depend on the decision of Member states and EU authorities.
Industry and financial group often join forces to challenge the EU’s sustainable finance agenda (5). They notably managed to delay the implementation of the Sustainable Finance Directive (SFRD). The EU taxonomy must not be another concession to their call to preserve a climate-destructive opacity. Contrary to what their flawed argument implies, one of the main weaknesses of the current EU taxonomy is that it does not directly contribute to shift financial flows away from environmentally harmful sectors.
Instead of rushing back to find caveats to empty the taxonomy from its meaning, the Commission should consider how to ensure that this framework has the desired environmental impact (6) and start exploring how to supplement it with a “significantly harmful” taxonomy. Such a complementary taxonomy would provide a much-needed tool for financial supervisors and authorities (5) to build a common climate language. It is a pre-condition for a European-size scale-down of financial support to activities at odds with climate objectives and to redirect it toward sustainable activities or activities in transition.