H.Before us Brussels enters in 2022, a bomb dropped. In a draft sent to I In countries, the European Commission has proposed to classify some nuclear and gas projects as green in its “classification”, a list that defines sustainable investment. Austria threatens to sue; Germany cried foul. The plan is still likely to receive majority support from member countries, which have until January 12 to comment. It could also set green investment conditions outside of Europe. But will it capitalize on the project it deserves?
The idea arose after the 2015 Paris Climate Agreement, when IEfforts to create a common green-bond standard for corporate and sovereign issuers have revealed that members disagree on what counts as green. Some countries have since worked with their own classifications, but Europe, which is the most comprehensive map of the economy with more than 550 pages.
The classification is expected to end the habit of green washing and increase investor confidence in sustainable assets. It will offer a general standard that investors and banks can use to screen for potential investments. Most money managers already have their own team and tools to measure green. But the lack of a shared benchmark means that scorecards remain thematic and inconsistent throughout the industry, confusing investors. Having a dictionary where they can see if an investment can be labeled green puts everyone on the same page.
Another aspect of planning is to link classification to expression. By the end of this year, about 11,000 listed European companies will have to report how much their sales and capital expenditures fit into the classification (the number of occupied businesses will eventually expand to 50,000). As of January 1, asset managers are required to provide details on which part of the product they have labeled as sustainable is in line with the already in-class bits. From 2024, most European banks will have to report a “green asset ratio” using the same criteria. All of this should include more and better climate-related information in the public domain. Daniel Clear, Asset Manager of Arabicesk, said: “Our best hope is to measure how much money is going to be spent on activities lined up with net zero.”
Eventually the classification will also underpin I Certification for issuers of securities creates direct links with the capital market. The Green-Bond Standard, for one, is expected to use the classification as its benchmark for eligibility. The commission will probably also use classification because it pays member states from its recovery funds, some of which are associated with green.
The detail and degree of rigidity of the European approach can help the classification to create a global gold standard. Other countries outside the bloc are working on their own plans. Each will probably be molded by political compromises, geopolitical concerns and carbon commitments. But foreign companies, asset managers and banks may eventually resort IIts classification, however, is because their European clients may need to report accurate data to create their own disclosures. Some may lobby their own government to limit diversity.
Another question is whether all this funding is enough for the channel towards proper investment. An immediate problem relates to implementation: Missing deadlines, requiring green-finance firms to report compliance with their classification, makes it difficult for companies to deliver the underlying data.
A major drawback is the limited coverage of the classification. This currently applies to a subset of economic activity. Disclosure requirements allow small public companies and all private companies to hook off Morningstar, a research firm, thinks it will affect only half of the fund’s assets I (Excluding private vehicles). It darkens at a time when listed giants, including miners and utilities, are rushing to divert their dirty resources to private investors. As more light may come IIts reporting requirements are extended to cover new companies, some of which are private. But it will take time.
The biggest problem lies in the flawed expectation that the mere existence of classification will change investors’ preferences. David Henry Doyle says greening a project is “a data point” S.AndP, A rating agency. Credibility, interest rates, and earnings prospects may be more important. The classification, significantly, does not create any incentives to support the starving green resources of the fund, such as low-carbon steel or electric-car charging stations. Instead, investors can continue to raise the price of safe, liquid resources such as wind or solar plants. Green is good, but it’s not enough.3
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This article is published in the Finance and Economics section of the print edition under the title “Gold Standard”