A clear and credible set of standards is vital for the future of sustainable investing.
It is the key to moving past claims of greenwashing, and to funnelling funds into sectors that will most effectively solve our biggest global challenges. That’s why the latest draft of the EU’s Taxonomy of Sustainable Activities, released last week, was such a landmark moment, outlining which sectors will officially be labelled ‘green’ for business and investment purposes.
But there is a danger of the taxonomy losing credibility at the first hurdle. Following intense pressure from certain member states, the European Commission has included some controversial sectors, such as forestry and bioenergy, in the final list, while suspending judgement on other questionable industries, such as natural gas and nuclear energy. Individual countries will always look out for their own interests, of course; but when it comes to sustainability, the EU should be focused on science, not political compromise.
The EU has set ambitious climate targets and, if it is to have any chance of achieving those, investors need clarity on where funding is most needed and be incentivised to provide it. Is natural gas the best place to be focusing our energies, given its high emissions and the existing financial incentives? Proponents may argue that it halves emissions relative to coal, but it has already displaced coal in many cases simply due to being cheaper. Plus, there is the danger that, by encouraging non-green sectors, you create long-term lock-in – something the taxonomy has explicitly committed to avoid.
Rather than boosting sectors that are only marginally better than existing solutions, the role of the taxonomy is to increase funds into those that will truly move the needle and that need the most help due to higher costs, lower revenues or levels of R&D. If investors can call themselves ‘green’ by focusing on sectors that are comparatively ‘easy’ to succeed in, then it puts that entire purpose under threat.
The fact that last week’s announcement prompted a walkout from environmental NGOs and consumer bodies is a sign that the EC has got some important points wrong, and that should be a concern. Losing the support of activist groups is the first step towards a loss of credibility across the board. And once that happens, greenwashing has a free pass to continue.
Creating the taxonomy was never going to be easy. The definition of what makes something sustainable is always relative, and it is clear that certain transitional sectors and technologies will be needed as we move towards a zero-carbon future. However, to serve its purpose, the taxonomy should be the gold standard of sustainability, with no compromises. Otherwise, we will never make the step-change needed to drive real, lasting change – and banish greenwashing for good.
Reynir Indahl is managing partner at Summa Equity, a purpose-driven private equity firm