Money makes the (green) world go round

Once approved, in January or February, the regulation will provide the legal framework for a daunting task: to define unequivocally, based on the best available science, what is ‘green’. A massive improvement for those who love this planet given that, currently, asset managers and national authorities are at liberty to define what is green, and that this liberty is being used to greenwash some truly unpalatable stuff.

The Good news. And the Bad news.

The bad news is that the regulation is only the beginning of the journey, and that it is far from perfect – being a compromise with some of the most regressive lobbies out there. The good news is that it is a decent compromise, and a clear step forward. The regulation is ‘good’ because it establishes a few basic principles:

1. It will be scientists and experts, not bankers and politicians, defining what is green;
2. It applies to all financial products, not just the ‘green niche’;
3. It protects consumers’ right to know where their money goes, thanks to strict disclosure provisions that differentiate ‘green activities’ from the rest (transitioning, enabling, not green, etc.)
4. It brings clarity to the sector of sustainable finance and it will contribute to its ailing credibility (25% of people don’t buy green funds because of rampant greenwashing, according to EuroSif) and therefore will bring lots of needed cash to the new ‘clean’ economy.

All good then? Absolutely not. At least three things can go very wrong in coming months.

Boobytrap #1: Are you in or out? A very crowded party

The Commission must now compile the ‘lists’ that define what economic activity is green according to the six criteria chosen. A draft (partial) list has been compiled by the Commission’s Technical Expert Group (soon to be defunct and replaced by a permanent Sustainable Finance Platform) for the first two criteria (climate change mitigation and adaptation).

The draft list has some very good things (for example, only zero emission vehicles are allowed and gas/nuclear power are excluded), some bad ones (biofuels, intensive animal farming and dubious forest management) and a lot of big gaps (aviation and shipping are not mentioned). The ‘lists’ of activities and the respective quantitative standards (thresholds) will be the subject of furious lobbying and will have to pass democratic scrutiny. All should be wrapped up by 2021 with the most contentious ones (climate change) due by the end of 2020.

Things can still go very wrong here. In particular when it comes to the very grey and disputable definition of the non-green ‘transition and enabling’ activities that lobbies have managed to squeeze into the regulation. These categories of not-green-yet-but-useful activities could become very big loopholes. Once the list is ready it’ll have to pass public scrutiny before it becomes law. Expect that ‘consultation’ to be a lively one.

Boobytrap #2: making it work for people, the issue of the eco-labels.

Despite what bankers and policymakers say, sustainable finance is a demand-driven industry. It was people, not enlightened bankers, who asked for the first time more than 100 years ago not to have stocks in their portfolio that didn’t match their values (they called them ‘sin stocks’). It started with weapons, alcohol, gambling, and today the wider responsible/ethical/sustainable/impact investment industry represents almost one-third of total assets under management. The problem is that when it comes to complex issues such as biodiversity, circularity, climate change and workers’ rights the possibility of fudging it is large.

The main purpose of the Taxonomy Regulation is to stop the fraud by which ‘sustainable’ portfolios include oil shares and pesticides. But for normal people to understand whether their fund is truly ‘clean’, the disclosure provisions in the regulation won’t be enough. What is needed is a good old label, something that will translate the technical assessment into a simple ‘stamp’. The EU has started the process to create an eco-label for financial products but the early proposals are completely inadequate and would do very little to stop greenwashing.

Boobytrap #3: making it work for asset managers, issuers and ESG rating agencies.

The regulation is vague enough to allow, essentially, business as usual in the universe of environmental, social and governance investment (ESG). Which is bad. They can keep labelling Shell and Volkswagen and Nestle the same as the most sustainable companies out there using various tricks, the main being the principle of ‘financial materiality’ ie, the principle by which an environmental issue is relevant to the company only to the extent that it might affect its bottom line. And that’s not what the taxonomy does: for the taxonomy the main principle is that ‘bees and birds’ do matter – whether their extinction affects your profits or not. Nature (life?) matters because it does, full stop. It is of paramount importance that the ESG sector picks up the taxonomy and uses it, or its impact will be severely limited.

To truly clean up finance we need cathedral thinking. In this respect, the Taxonomy Regulation only provides the foundations. We’ll need to build the walls and roof in 2020 and 2021. Whether it becomes the instrument to tame the ‘animal spirits’ and stop capitalism from destroying what remains of the natural world, or… simply the small print on a product (“beware this might harm your health”) is for us to determine.