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July 20, 2022

EU green taxonomy survives but not unscathed

The European Parliament has approved an EU proposal deeming gas and nuclear "green" investments, but the controversy around the taxonomy means investors may hesitate to use it.

By Dave Keating

In June, the European Parliament’s industry and environment committees recommended rejecting an EU taxonomy list of “green” investments because it included gas and nuclear power. The Commission says these could serve as “transition fuels” towards a renewable future. In the end, a majority of MEPs agreed with it – the full Parliament voted on 6 July to approve the list. Luca Bonaccorsi, sustainable finance director at campaign group Transport & Environment (T&E), called it, “the biggest act of greenwashing in history”.

Given the controversy, one would be forgiven for thinking the entire purpose of this list was to enable green funding for nuclear and gas. In fact, the list has been under development for many years. It is not, as has been reported, a mandate for how green funds should be spent. It does not dictate to any private or public entity what they can or cannot invest in. It simply defines what economic activities are aligned with EU sustainability objectives, to provide some clarity and certainty for those companies and investors who want to keep their investments green. It is, in other words, a guideline. The only area where it will be required is in corporate disclosure – EU-based entities will need to disclose how much of their investments are in activities found on the list.

Brexit consequence

But just because the taxonomy was not going to mandate investment does not mean it was not going to be important. Climate campaigners have said for years that such a list is crucial to define what is and what is not a green investment, to avoid greenwashing and stranded assets. A basic first list was put together, but when it came to assembling the complete list the Commission was confronted with an existential question: is nuclear power a green investment? It does not emit CO2, so for many it was a no-brainer to include it on the list, and before Brexit there was enough support in the EU Council to include nuclear, overcoming the objections of anti-nuclear Germany, Austria, and Luxembourg. However, after Brexit in 2020, the pro-nuclear UK votes were lost. That meant Germany and its anti-nuclear allies could keep it out of the taxonomy.

Virulently pro-nuclear France, however, would not accept that. France and its pro-nuclear allies vowed to kill the whole list unless nuclear was on it. Without a majority for or against, a compromise was forged between Paris and Berlin: nuclear would be included for France, gas would be included for Germany, and both would support the list.

Once the compromise was forged, the Commission released its taxonomy proposal in the dead of night on New Year’s Eve this year. Controversially, it has proposed it as a delegated act rather than a legislative proposal, which means the Council and Parliament can only approve or reject it – they cannot amend it as they can with normal legislation. So, at first, it looked as if MEPs would hold their nose and approve it, rather than risk having no taxonomy at all. Commission President Ursula von der Leyen had said that if the Parliament rejected the list, the Commission would not propose a new one with gas and nuclear left out. Although the war in Ukraine galvanised MEPs on the industry and environment committees to recommend rejecting it last month, in the end the full Parliament was wary of killing the entire list.

Vanished credibility

However, sustainable investment experts say we have ended up with no taxonomy list anyway – at least not a credible one. “Financial markets, European citizens and the EU’s own climate bank have made perfectly clear that the taxonomy’s usefulness will be severely implicated by labelling gas and nuclear as green,” says Johanne Schroeten, a policy advisor at think tank E3G. “But vested interests seem to have gotten the upper hand.”

The original intention was to create a guideline backed by the EU that would have absolute credibility – the defining authority on what constitutes sustainable investing. Instead, the controversy over including gas and nuclear will cast a shadow over its future use. “With gas in the taxonomy, the EU has missed its chance to set a gold standard for sustainable finance,” says Laurence Tubiana, CEO of the European Climate Foundation, which works with companies on greening their operations. “The EU taxonomy now falls short of its own initial goal, which was to prevent greenwashing in the financial system. Investors, companies, and consumers will now be looking elsewhere for the science-based clarity and credibility they need.”

Marco Musso, a policy officer on fiscal reform at the European Environmental Bureau, an NGO, says the inclusion of gas and nuclear “represents a serious blow to the transparency and governance of the overall process, putting at risk the further development of the EU Sustainable Finance framework”. Into that vacuum will step other sustainable investment lists. The problem is that there may be a multitude of them, and none will have the heft and authority that a credible EU taxonomy would have had.

Most damaging is the impression that the scientific and market integrity of the taxonomy has been abandoned for the sake of political expediency. Bonaccorsi from T&E points out “almost 75% of the estimated green funds [using the taxonomy] will go to France and Germany. The criteria to access green funds have been skilfully designed to steer all funds towards the two member states that co-authored the law".

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