Lack of clarity on which economic activities truly benefit the climate is hampering capital allocation and enabling greenwashing, argue Sandrine Dixson-Declève (Co President, The Club of Rome) and Johan Rockström (Director, Potsdam Institute for Climate Impact Research) in this op-ed published by Reuters.
Record-breaking climate extremes show our planet is under increasing strain. The COVID-19 pandemic has reinforced the case for a robust response to the planetary emergency, teaching us just how closely the well-being of societies and stability of economies is linked to the health of the natural world.
Policymakers are listening to the electorates’ clamour to address the climate emergency and setting ambitious targets. The EU is leading the race, with a bold plan to become the world’s first carbon neutral continent by 2050 and reduce its CO2 emissions by at least 55% by 2030.
Achieving these goals and delivering on the European Green Deal means billions of euros of private and public money must be channelled into re-imagining and rebuilding the European economy after the COVID-19 crisis. The European Investment Bank has already committed to becoming the EU’s climate bank.
Vast numbers of private investors, keen to see their assets as well as the planet prosper, are ready and waiting to provide this capital, an overwhelming number now citing climate change as their top priority. European countries and cities are already poised for action, shifting public procurement and investment plans to reflect green criteria.
Yet sustainable investments of this magnitude can only happen with clear, science-based definitions of which economic activities that are truly green and which are not. Lack of clarity is currently hampering investors’ efforts to allocate capital and allowing the greenwashing of investment products.
Here again, the EU is driving the global conversation with its EU Sustainable Finance Taxonomy, a soon-to-be enforced classification of economic activities – such as renewable energy, energy efficient buildings and public transport – that make significant contributions to the EU’s six environmental objectives, and those, such as coal-powered energy generation, which do not.
Last month, the European Commission published a draft text (a Delegated Act) listing the criteria for activities falling under the EU Taxonomy for two of the most urgent environmental objectives – climate mitigation and adaptation – to be adopted following a consultation period closing on December 18.
It is crucial that the final text of this Delegated Act defines criteria for green activities as recommended by the Technical Expert Group (TEG) on Sustainable Finance, and is not watered down by short-term, narrow interests of certain industries and member states.
Industry, civil society and scientists have warned that any weakening of the TEG’s science-based recommendations, especially in relation to key industries like energy generation, bioenergy and agriculture, is likely to result in the EU failing to shift private capital at the pace and scale needed to meet its climate ambitions. Only by sticking firmly to the TEG recommendations will it avoid greenwashing and ensure future private sector lending is aligned with the Paris Agreement and EU’s climate neutrality goals.
EU leaders have, commendably, committed to a higher CO2 reduction target by 2030. But if the EU waters down its taxonomy, it would be a blow to its ambition to become fully climate neutral by 2050. European leadership on climate has already shown signs of faltering. The current Common Agriculture Policy proposal might lock Europe into business-as-usual agricultural practices for the next seven years, and the green conditionalities in the EU recovery package and budget are at risk of being weakened during negotiations.
The EU must uphold its leadership stance on sustainable finance by following science in setting its taxonomy. As other countries like China develop similar taxonomies, Europe should set an ambitious global gold standard for sustainable investments for others to follow.
The next 10 years will determine whether or not we succeed in creating a healthier, greener world in which capital markets can thrive in support of human prosperity whilst ensuring a just transition to a net-zero economy. By making sure the EU taxonomy follows the TEG recommendations we can be assured in Europe’s ability to deliver a truly green gold standard for sustainable investments at the same time as driving the agenda towards a healthy, safe and prosperous planet.
In 2021 the EU Commission will develop further EU taxonomy criteria for activities under the remaining four environmental objectives – circular economy, protection of water and marine resources, pollution prevention and control, and the protection of biodiversity and ecosystems. It is crucial these follow the science, too. Not doing so will set a dangerous precedent for future environmental objectives and sustainable finance overall.
Sandrine Dixson-Declѐve is Co-President of the Club of Rome, a member of the former Sustainable Finance Technical Expert Group and a member of the current Sustainable Finance Platform.
Johan Rockström is Director of the Potsdam Institute for Climate Impact Research and Professor in Earth System Science at the University of Potsdam.