Europe should keep its green bar high

The European Union’s attempt to protect the environment by developing a complicated, wide-ranging definition of green investments has run into yet more problems. This time, it’s opposition from those who support a more incremental approach.
A new draft of the bloc’s sustainable finance taxonomy, which seeks to catalogue only activities aligned with climate protection, includes some forms of unabated natural gas generation. The addition of a fossil fuel to the list predictably drew protests from academics, non-governmental organizations and some investors. More than 200 of them signed a letter objecting to the change.
The move appeared to be a concession to industry and government lobbying from gas-reliant countries, particularly in central and eastern Europe. Meanwhile, some of the most high-profile figures in sustainable finance responded to the uproar by criticizing the taxonomy for being too strict to be effective.
The two groups have somewhat different concerns. The fossil fuel industry doesn’t want their access to capital diminished. Finance executives are worried that it will be difficult to meet the booming demand for green investment products when only a fraction of assets would fall under the taxonomy.
Here’s a typical argument from those who worry about losing profits from fossil fuels. Anna Michelle Asimakopoulou, a conservative-aligned European Parliament member from Greece, wrote in January that the taxonomy would damage energy-intensive industries such as aluminum as companies would most likely be required to comply in order to access public funding.
As for the financial sector, the complaint is often that setting too-high standards is unrealistic. UBS chair of sustainable finance Huw van Steenis wrote in Bloomberg Opinion that only including the “purest shade of green” would exclude most bonds, and urged that the taxonomy should include other “shades”. Mark Carney, the United Nations’ special envoy on climate and finance, echoed the argument at a Financial Times conference.
Both objections misunderstand the taxonomy’s purpose, which is to set a very high bar based on what scientists have worked out is needed for us to avoid the worst effects of climate change. Instead of assessing sectors or companies as they are now, the taxonomy identifies, at a granular level, what forms of activities such as energy generation, building construction, and manufacturing will lead to a safer planet.
This sets it apart from other frameworks, such as the Taskforce on Climate-Related Financial Disclosures, which seek to identify risks arising from climate change. Or the sustainability reporting project being developed by the IFRS Foundation, which hosts accounting standards used across the world.
It’s also very different from commercial sustainability ratings systems, which often provide a “best in breed” selection—the companies with, for example, the lowest emissions or best disclosure in their sector.
These approaches all seek to make incremental improvements to finance and industry as they currently are, rather than benchmarking them against where they should be if the whole world is to keep temperatures from rising more than 1.5°C from pre-industrial levels.
—Bloomberg