Why we cannot celebrate yet: EU’s strategy on sustainable finance

July 15, 2021

The EU has launched its new sustainable finance strategy. For those relatively unfamiliar with the topic, but even for those who work in the sector, it’s a jungle of acronyms: SFDR, CSRD, ESG, Taxonomy, DNSH, GAR/GIR etc. But to an environmentalist, finance is essentially sustainable if it excludes fossil fuels, combustion engines, and the destruction of nature. So, how is the EU doing on these three fronts? Is the EU strategy ‘fit for purpose’ to address these issues?

Funding fossil fuels

Although it’s not uncommon to find oil companies in so-called sustainable funds, thanks to flawed sustainability ratings (the notorious ESG ratings), oil and coal are pretty much excluded at this point and have no place on the EU’s green list. But gas… gas looms large over the energy and transport sector.

Gas had been excluded from the list of ‘clean’ energy sources but the industry lobby, through friendly member states, has changed that. Gas will be reassessed sometime after the summer to be classified as a ‘transitory’ source of cleaner energy. The EU Commission doesn’t appear to have the strength, or the will, to keep it out of green finance. The jury is still out but the simple answer for the time being is that no, EU’s sustainable finance does not exclude fossil gas. Not unequivocally. Not yet. And as far as the ESG ratings scandal, the new strategy only announces vague plans to address the issue.

Destroying nature

Once upon a time it was all about carbon and CO2. But now more attention is being paid to biodiversity. The term includes a whole range of human activities that impact life on land, sea and air: agriculture, fishing, forestry and bioenergy. On this front, the EU’s sustainable finance plan is either silent or outright bad. To start with, the taxonomy greenwashes indiscriminate logging and the burning of trees. Criteria for agriculture, like gas, have been postponed to the autumn but if forestry and bioenergy is anything to go by, it does not look good.

The announced revision of the Renewable Energy Directive says a lot about the plans that the EU has for nature: plough, spray, harvest and burn. The illusion that we can replace the burning of fossil fuels with the burning of trees and crops still seems to pervade. Here the EU’s sustainable finance strategy fails spectacularly. The only thing that was announced was a ‘study’ to measure the impact that the loss of biodiversity will have on banks’ profits. Hardly the point.

Phasing out combustion engines

Good news at last. When it comes to land transport – responsible for 72% of the emissions in transport – the provisions are positive, strong, and unequivocal. Essentially, no combustion engine will be considered ‘green’ after 2025. Not even the ‘cleanest’ one, not even the ones burning so called ‘clean fuels’. The rule is ‘no tailpipe emissions’, full stop.

To complement the unequivocal taxonomy criteria, the Sustainable Finance Disclosure Regulation demands full disclosure of lifecycle emissions. This is particularly damning for transport since most of the emissions of a car (up to 80%) happen after the car is sold. Not many know that Volkswagen, for example, causes more emissions than oil companies BP or Chevron when lifecycle emissions are properly accounted for.

When it comes to cars and trucks, the EU’s sustainable finance gets a 10/10. If you’re a bank or a fund and you’re investing in combustion engines, you’re either (financially) illiterate or just uninterested in sustainability. In both cases, you’re on the wrong side of history and will not be around for long.

Unfortunately the same cannot be said for shipping. Here the EU is really missing the opportunity to send the right message to the industry. It’s greenwashing the newest vessels that burn bunker fuel and is leaving the door open to fossil-gas fuelled ships. The jury on aviation is still out, but here we expect some good news.

So in conclusion… 

The EU’s sustainable finance strategy and provisions are mostly good on transport, still bad on fossil fuels and disastrous on nature protection. Fast forward 30 years, and you’re looking at a world where we all drive EVs, but there are no trees or birds, and catastrophic climate events ravage wide areas of the planet. Clearly there’s a lot of work to do to call this sustainable finance… well… sustainable.

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