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First Glimpse of EU’s Green Rules Shows Climate Goal Fight

Jill Ward and John Ainger
·4-min read

(Bloomberg) -- The European Union agreed its first criteria for green investments on Wednesday, in a move that could set a benchmark for the world to follow.

The stakes are high: the EU wants to raise up to 250 billion euros ($301 billion) using its first green bonds, and private funding is likely to follow into the approved industries seen helping reach a legally-binding goal to eliminate emissions. Forestry and bioenergy are in, while the controversial sectors of agriculture, natural gas and nuclear power have been excluded -- for now.

Forming this so-called taxonomy was a political battleground for the bloc, as member states pushed to protect their own interests, exposing just how tough it is to make economies and markets eco-friendly. Any weakening of the rules risks harming the EU’s climate leadership credentials, at a time when investors are scrutinizing whether feel-good green assets live up to the hype.

“If you want a science-based taxonomy, you need to keep the standard high,” said Maia Godemer, an analyst at BloombergNEF. “But changes as a result of lobbying push it away from that. The goal is to drive investment to where we need to be by 2050. It’s awaited by everyone -- China, Singapore and the U.K. are all building their own taxonomies and looking to the EU as a model.”

EU lawmakers and the bloc’s governments reached a deal in principle early Wednesday to make its climate neutrality goal legally binding and to reduce 2030 emissions by at least 55% from 1990 levels. The new taxonomy will be adopted at the end of May and will apply from 2022.

“We are stepping up our sustainable finance ambition to help make Europe the first climate-neutral continent by 2050,” said Mairead McGuinness, the EU’s financial services chief. “Now is the time to put words into action and invest in a sustainable way.”

Yet in markets, a rally in the region’s renewable stocks has faded this year and there are concerns about soft targets set by companies issuing sustainability-linked bonds. Total issuance of green debt has exploded to over $1 trillion yet there’s still a patchwork of rules for spending on projects.

Investors will be hoping that the EU framework at least brings clarity and potentially leads to a more joined-up global approach. U.S. President Joe Biden is expected this week to pledge a target of reducing U.S. emissions of greenhouses by at least half by the end of the decade as it holds a summit on climate change with world leaders.

“This is a big week for green investing,” said Lewis Grant, a senior portfolio manager for global equities at Federated Hermes. “Investors in sustainable themes will be buoyed by these developments, although as ever the devil is in the detail.”

The taxonomy will allow producers of rechargeable batteries, energy efficiency equipment, low-emission cars, plus wind and solar power plants to earn a formal green label. While their inclusion is little surprise, more heated was the debate around power from gas, nuclear energy and biofuels.

A last-minute push by pro-gas politicians from Germany, Poland and other member states that are trying to reduce their reliance on coal appeared unsuccessful. While the first set of criteria excludes gas, certain activities in the sector could be included in another measure later this year, as well as separately to address the transition away from coal, said EU Commission Vice President Valdis Dombrovskis.

Such gas projects would need to meet very strict criteria, including a provision that there must be no technologically feasible low-carbon alternatives, according to Dombrovskis.

Ronald van Steenweghen, a money manager at Degroof Petercam Asset Management, said he would be reluctant to buy the EU’s green bonds if there was the potential for natural gas to be included later on. Raising green debt to fund gas projects would be weaker than current norms.

“I would assume that it would be made clear prior to the issuance to the market, especially if the commotion around the topic increases even further,” he said.

The taxonomy will include energy from burning wood. It won’t stop industrial-scale logging, in a capitulation to the Nordic lobby to weaken the rules, according to Sebastien Godinot, an economist at the WWF’s policy office in Brussels. The criteria may get tightened but for forestry it’s an “uphill battle,” said Bas Eickhout, a Dutch Green member of the European parliament.

“The idea was to build a so-called gold standard,” said Sebastian Mack, a policy fellow at Jacques Delors Centre, a think tank based in Berlin. “The longer it takes, the more politicized it will get and in the end, we’ll always see that the ambition is watered down.”

(Updates with publication throughout.)

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