Opinion: EU taxonomy will damage impact investing if used incorrectly
The regulation adds to the growing list of rules under development around the world to deter greenwashing
The green taxonomy was created to provide a clear and standardised framework so that investors could have reliable information over the sustainability credentials of their investments and avoid greenwashing. However, the collective market view of the taxonomy has shifted from a niche of best-practice, data-backed investments to the more problematic view that taxonomy-compliant investments are good and non-compliant ones are bad.
This mindset has encouraged policymakers to include nuclear and gas in the EU’s regulation due to the concern that if these asset classes are not included in the taxonomy, investment will dry up.
Such energy sources have a role to play in the transition and may still need investment now. However, labelling them as the crème-de-la-crème among the green is clearly not the answer to this concern. The binary approach of the EU taxonomy, unlike the multi-tiered ASEAN approach, seems to have promoted such concerns.
On the other end of the scale are the investments which are impactful from an ESG perspective but for one reason or another may not fit the remit of the green taxonomy, for example, projects by multilateral development banks. Many of these projects fall outside the EU’s green taxonomy because they take place outside of the EU where the data is not readily available and they do not see the same benefits that EU-based projects might see, such as exceptions for companies that are part of the EU’s energy saving schemes.
If we take the green taxonomy as the ‘be all and end all’ of green and socially-good investments, the sustainable finance efforts will be shooting themselves in the foot.
This wouldn’t be the first time that sustainable finance initiatives have been misused and warped to apply in a way they were not intended. The EU’s Sustainable Finance Disclosure Regulation (SFDR) was intended as a disclosures framework but is now regularly used as a labelling device for asset managers to help sell a fund that complies with the Article eight or nine disclosure requirements. In the rush for ESG investments, it won’t be a surprise if taxonomy is picked up with similar vigour.
Now the taxonomy has been used to help create the EU Green Bonds Standard and will likely be used as a guide more broadly, it’s even more important that the industry and regulators view the taxonomy for what it is: a niche and data-backed list of the best practice of green investments. Nothing more, nothing less.