What is the future of sustainable finance?

Blog Apr 23, 2021

On 21 April the much anticipated first delegated act of the EU Taxonomy was presented by the European Commission. Dr. Therese Rudebeck and Sarah Breslin are working on how to make investors aware of water as a financial risk. What do the latest developments mean for the future of sustainable finance?

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To reach the objectives of the EU Green Deal, which sets out the pathway for Europe to become climate neutral in 2050, the entire economy and the underpinning financial system need to undergo a fundamental transformation. To support the EU Green Deal, the Commission has since 2018 been developing a comprehensive policy agenda on sustainable finance, including the Action Plan on Financing Sustainable Growth. One key component of the Action Plan is the EU Taxonomy – a document that aims to define which economic activities can be classified as sustainable. The taxonomy set out to stop “greenwashing” – the marketing of products and services to give a false impression of their environmental friendliness. However, when the EU Commission presented the first delegated act of the Taxonomy on 21 April it was immediately met by disappointment from critics who felt it was not ambitious enough. The critics said that the Taxonomy now actually risks contributing to greenwashing. This, they argued, could jeopardize the credibility of the green market, the EU Green Deal and the EU’s capability of reaching climate neutrality.

The EU Commission was tasked with establishing the list of activities to be included in the Taxonomy and were advised by a group of experts in the Technical Expert Group (TEG), now overgone into the EU Platform on Sustainable Finance. It includes representatives from civil society, academia, business and the finance sector. In an open letter, some of the members of the Platform voice their concern that the recent development of the Taxonomy Regulation goes against climate science.

Whilst the mandate of the Platform is simply to ‘advise’ the Commission, many feel that the recommendations from experts appointed by the Commission should be listened to. The reasoning for this is that the EU needs robust regulation that is based on scientific evidence if we, as a society, are to reach climate neutrality by 2050. If policy diverges from science, it risks creating regulations that are full of gaps and loopholes – and it is these documents that are setting the foundation for EU environmental work going forward.

The European Consumer Organisation announced on Thursday 22 April that it had suspended its activities in the Platform, since it could risk consumers being ‘misled into investing into businesses that are directly contributing to climate change – against their wishes’. Investors and their customers need a fair chance to understand what economic activities are, truly, contributing positively to our environment.

Historically, the lack of regulation around what can be classified as sustainable has been cited as an obstacle for progression in sustainable finance. Experts agree that sustainability needs to be defined by science because not everyone can be an environmental expert. Evidence-based policy corroborated by multi-lateral research is the foundation upon which sustainable climate action should be built. Reactions to the new delegated act show that policy and regulation that falls short of this, risks doing more harm than good.