Sustainable investing enters 2022 at a crossroads. Assets of funds focused on sustainable investing reached $3.9 trillion in September, nearly doubling in six months. Yet concerns about so-called greenwashing persist. The latest draft of the European Union’s key anti-greenwashing tool offers cause for hope, but also concern.
Money managers should know by now that mislabelling green investments is risky. True, Sweden’s financial supervisory authority said in November that only 5% of 400 funds it examined made unsubstantiated green claims read more . But the U.S. Department of Justice said in August that it was probing Deutsche Bank’s (DBKGn.DE) asset management arm DWS (DWSG.DE) for alleged overstatement of its sustainability credentials read more . A robust, state-endorsed opinion on what is and isn’t green would be a big help.
On the face of it, the EU Taxonomy fits the bill. China’s version is just a catalogue of green bonds, and the United States and the UK have yet to draft their own systems. But the EU’s model will comprehensively say what is green, and thus worth investing in, and what is not. EU-based companies will have to declare what share of revenue and investments goes into activities aligned with climate change objectives.
Yet Brussels’ taxonomy has bitter critics. No wonder: after pressure from heavy coal users like Poland amid sky-high energy prices, the latest draft permits new carbon-emitting gas stations until the end of 2030, as well as nuclear energy ones up to 2045. Both are problematic. Gas, although less polluting than coal, emits more than the 100 grams of carbon dioxide per kilowatt hour that scientists say is needed to help keep global warming in check. Nuclear energy produces highly polluting waste.
Injecting a hint of greenwashing in what is supposed to be a greenwash-killer is a major fudge. The latest EU taxonomy draft does admittedly call gas and nuclear “transitional” technologies, with gas accepted only in certain circumstances, such as when it replaces coal. But the tool’s main defence against uselessness is that asset managers opting to invest in the two dirtier areas will need to clearly flag that they are doing so.
Even an underwhelming taxonomy is arguably better than nothing, and further redrafts may yet happen given the opposition of member states like Austria read more . Still, if investors treat the new tool as a simple kitemark rather than something that requires extra scrutiny, then it may add more greenwash than it removes.
The Context
- The European Union on Dec. 31 released draft plans to label some natural gas and nuclear energy projects as “green” investments.
- The draft of the European Commission’s proposal, seen by Reuters, would label nuclear power plant investments as green if the project has a plan, funds and a site to safely dispose of radioactive waste. To be deemed green, new nuclear plants must receive construction permits before 2045.
- Investments in natural gas power plants would also be deemed green if they produce emissions below 270 grams of carbon dioxide equivalent per kilowatt hour, replace a more polluting fossil fuel plant, receive a construction permit by Dec. 31, 2030, and plan to switch to low-carbon gases by the end of 2035.
- Gas and nuclear power generation would be labelled green on the grounds that they are “transitional” activities – defined as those that are not fully sustainable, but which have emissions below industry average and do not lock in polluting assets.
- The draft amendments to the EU taxonomy could change before the Commission publishes the document at the end of January. Once published, it could be vetoed by a majority of EU member states or by the European Parliament.
