People attend a demonstration calling for action against climate change in Brussels on October 24, 2019 | Thierry Roge/AFP via Getty Images
The ‘taxonomy’ law aims to attract much-needed capital to meet EU climate goals.
With Europe’s green push comes new business opportunities — but Brussels wants to ensure they’re the right ones.
EU legislators on Thursday reached a provisional agreement on rules meant to clarify what counts as “green” finance. From its name — the taxonomy regulation — to the highly technical provisions on what can labeled as sustainable, the initiative seems obscure and complex.
But the agreement of the European Parliament, Council and Commission stands to be a crucial step in raising the money needed to meet the bloc’s climate goals.
“The EU’s green standard will mean investors can no longer be sold fake green investments. If we want to halt climate change we need money to be flowing towards good things,” said William Todts, executive director of NGO Transport & Environment.
The Commission has big plans for the taxonomy. It will be the basis for an EU standard for green bonds and for an ecolabel for retail investment products, as part of the green financing strategy that Commission Executive Vice President Valdis Dombrovskis is working on.
It may also be used to facilitate banks’ loaning to green projects — something the Commission is considering as part of its review of banks’ capital requirements.
The agreement still needs to be approved by EU ambassadors and by political groups in Parliament, with a view to formalize the compromise in December.
POLITICO lists five things you should know about the taxonomy.
Without a common definition for sustainable investment, financial firms can market products as green without disclosing their environmental credentials. The legislation will oblige them to measure investment products against a binding EU standard and disclose to what extent they align with it.
Negotiators engaged in a fierce battle over the extent to which this would apply to all financial products — the Parliament’s position — or just the “green niche” of products labeled as sustainable, a less impactful option preferred by the Council. In the end, the new rules will apply to all funds that are marketed as sustainable or green, or that marginally contribute to an environmental objective, according to a draft compromise text seen by POLITICO.
The new rules will be binding from December 2021.
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Thursday’s deal defines the legislative framework for the taxonomy but the full list of what can be called “sustainable” is still being worked on.
A Commission expert group has been tasked with creating technical screening criteria for economic activities that will make the grade. For instance, the experts wrote in a draft report this summer, investments into power generation would have to stay under 100 grams of carbon dioxide per kilowatt-hour, with an aim of reducing this cap every five years “in line with a trajectory to net-zero [carbon emissions] in 2050.” They also excluded investment in atomic energy on the grounds that nuclear waste is an environmental hazard without solution.“It was not possible … to conclude that the nuclear energy value chain does not cause significant harm to other environmental objectives,” they wrote.
The experts are due to submit a final report by the end of the year. Then it will be up to the Commission to cast the recommendations into law via delegated acts.
The gas and nuclear sectors have been lobbying to make the list, arguing they have an important role to play in decarbonizing the energy sector.
The rules agreed Thursday explicitly exclude investments into solid fossil fuels — something Parliament pushed for to halt investments in coal.
But France — which depends on nuclear energy for three-quarters of its power — opposed the outright exclusion of nuclear from the legal text. Instead, investments in nuclear will have to be checked against a “do-no-harm” principle taking into account the environmental problem of nuclear waste.
That’s seen as a win by some anti-nuclear policymakers. “The de facto exclusion of nuclear power was a success for the European Parliament,” said Sven Giegold, a Green MEP.
Others maintain this is still an open battle, which will re-emerge when the Commission drafts the relevant delegated acts.
The new Commission has made achieving net-zero greenhouse gas emissions one of its top strategic priorities. To get there, the bloc will need investment, and a lot of it.
The Commission estimates the EU needs €180 billion a year in additional investments over the next decade to reach its 2030 climate targets. If the EU wants to cut emissions to net-zero by 2050, the needed annual investments balloon to €290 billion.
Having a clear definition of what sectors need to be developed should help channel private capital into areas including offshore wind, electric vehicles, heat pumps and hydrogen.
The taxonomy should act as a “shopping list” for investors, said an official involved in negotiations.
The EU’s taxonomy won’t be the only green investment standard. China — which has outpaced Europe as a producer of renewable energy, electric vehicles and batteries — already set its own.
Under the guidance of Ma Jun, chairing China’s Green Finance Committee and formerly chief economist at China’s central bank, Beijing set standards for sustainable investments to leverage private capital to decarbonize its economy. “Only 10 percent [of the costs] can be covered by government budget,” he told a Brussels conference earlier this year, adding the rest needs to come from the private sector. “Otherwise all the targets that you’re setting … are not going to be possible.”
But Chinese standards for green bonds are laxer than Europe’s. For instance, they include new generation coal power plants. Brussels would like Beijing and others to fall in line with the EU, and set the global standard for sustainable investments. This would also give Europe’s own financial sector the advantage of having to comply with one made-in-Brussels standard instead of different ones in each market where they operate.
Putting the taxonomy in place will be a massive exercise for years to come, with experts updating standards as technology evolves. But Brussels has plans for even more.
The incoming Commission will set out a new sustainable-financing strategy by mid-2020 as part of the proposed Green Deal, Commission Executive Vice President Valdis Dombrovskis said in November. The plans include an EU standard for green bonds and an ecolabel for retail investment products, both to be based on the taxonomy.
In the future, the taxonomy could also be the basis for a “green supporting factor,” letting banks hold less capital for projects aligned with the EU’s definition of sustainable investments. EU capital requirements are now under review, and one of the questions asked by the Commission is whether there should be “dedicated prudential treatment” for assets “associated substantially with environmental and/or social objectives.”
Some advocates would like the Commission to go further and create a “brown” taxonomy of investments that negatively impact the climate and the environment.
“The real issue is to put the real risk factor on brown investments,” said Philippe Lamberts of Belgium, co-president of the Greens in the Parliament, at a press briefing Wednesday.
A brown penalizing factor would require banks to hold more — not less — capital for projects associated with climate risks, such as fossil fuel investments. The deal reached Thursday includes a review clause — something pushed for by Parliament — requesting the Commission to evaluate the impacts of extending the taxonomy to all economic activities.
But for banks it’s a no-go, and the Commission has resisted calls for a “full” taxonomy.
“There is huge resistance to having a brown taxonomy,” Lamberts said.
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