Many of the problems with the European Union’s Taxonomy of Sustainable Economic Activities — including its politicisation in recent months, which forced the European Commission to distort it to squeeze in gas and nuclear power — can be blamed on a poor original design.
Whether it was ever wise to try and produce one bible of what is sustainable is debatable. As market participants are finding, the Taxonomy is almost inevitably too prescriptive in some places, too lax in others.
But granted that the idea was worth trying, the framers made a hash of it. They decreed that every activity that qualified must make a substantial contribution to one of the Taxonomy’s six environmental objectives, while doing no significant harm to any of the others.
That inherently created three bands — harmful, not harmful and beneficial. But only the beneficial category was given legal standing. The rest are simply not described.
Now the Platform on Sustainable Finance, which advises the European Commission, has astutely sketched in the missing parts that should have been there all along. Just using the criteria already part of the Taxonomy, or soon to be added, activities can be categorised into red, amber and green.
Crucially, these bands are not static. The thresholds for each should get tougher over time, until the whole economy is sustainable. Markets could use this guidance to structure transition financings with real rigour.
Unfortunately, the Platform’s fuller architecture, though making eminent sense, is just a report. To give it weight, new legislation would be needed, probably taking the best part of two years.
The Platform hopes market participants will pick up its Extended Taxonomy and use it voluntarily. They may — but the market has now woken up to a wealth of other sustainability guidance, such as Science-Based Targets, which also set out how rapidly companies should transition.
Through sustainability-linked bonds, investors are beginning to learn how to judge what transition plans are ambitious and which are feeble, without reference to the Taxonomy.
The Extended Taxonomy could be useful in future, partly because of its comprehensiveness — it deals with water, recycling, biodiversity and being prepared for global warming, as well as carbon emissions.
But its virtue will always rely on those who set the criteria — the European Commission.
So far, with its gas and nuclear fudges and capitulation on climate-harming biofuels and industrial forestry, the Commission has not proved the Taxonomy is safe in its hands.