EU on Sustainable Finance: Unanswered questions remain

© Fotolia/Schönfeld

Sustainability, environmental and sociological factors as well as governance have become key elements of investments on financial markets. The demand for these types of investment increases steadily. The European Commission has presented proposals harmonising the sustainability criteria on the Single Market. However, these proposals still leave many questions unanswered.

According to the European Investment Bank (EIB), approximately 270 billion Euro of investments in transports, energy and resources management lack every year in order to reach the EU climate and energy targets. Therefore, the European Commission submitted an Action Plan for sustainable finance and corresponding policies in March and May 2018, respectively.

Among these policies, three should be highlighted:

  • A harmonised EU classification system (taxonomy) to assist investors in identifying environmentally friendly and sustainable economic activities
  • Special duties for institutional investors to ensure compliance with sustainability criteria
  • Benchmarks regarding CO2 emissions

Moreover, an expert panel was set up to regularly give advice on the processes and the Action Plan itself. The core of the package is a taxonomy aiming at creating common standards for a “greener” economy. To comply to the package, at least one of the six so far presented criteria must be met completely and none of the six criteria should be violated completely:

  1. Climate change mitigation
  2. Climate change adaption
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy, waste prevention and recycling
  5. Pollution prevention and control
  6. Protection of healthy ecosystems

All measures to close the considerable investment gap concerning sustainable investments should be supported and encouraged. Nevertheless, the proposals at hand leave many questions unanswered: For instance, the consideration of industrial value chains in the context of taxonomy is underdeveloped. Even if single activities do not meet the criteria, it is still possible that these activities are part of a larger value chain complying to the criteria. For example, the production of raw materials such as metal or chemicals is often energy- and CO2-intensive. However, these materials are key elements for environmental and sustainable activities such as the use of renewable energies. Until now, the European Commission has not presented a pragmatic approach taking into account the complexity of value chains. Moreover, the technical expert group consisting to a large extent of representatives of financial markets lacks know-how of the real economy and manufacturing value chain.

Details about the six criteria will only be presented within the framework of so-called “Delegated regulations”. For this reason, there are only few opportunities to participate in the legislative process and to contribute industrial expertise. Specific economic activities should in no circumstances be excluded from the list of sustainable investments. A strictly binary view - sustainable versus non-sustainable - would not meet economic reality. Further proposals such as the disclosure duties for investors as well as low-carbon and positive-carbon impact benchmarks will build upon the framework of the taxonomy. Those measures can only succeed with a feasible and business-friendly classification. For this purpose, more economic expertise must be integrated into the development of these proposals.

“Sustainable Finance” is a promising project and could become a successful story for the real economy. But it should not only be considered from a purely financial perspective: this is necessary to achieve the objective of increasing investment in sustainable transport, energy and resources management and to avoid creating new nomenclatures for investment products.