New Taxonomy Released to Combat Greenwashing in Investments

Investors, insurers, and financial institutions in the EU have a new method for assessing the sustainability of their investments. Last week, the Observatory Against Greenwashing launched its independent Science-Based Taxonomy, in direct response to the EU Taxonomy system that some say is ineffective. 

The EU Taxonomy is a classification system that claims to give investors, businesses, and financial institutions a common language for identifying the degree to which a specific investment, financial product, or economic activity can be considered sustainable.

However, critics have said the draft guidance is not sufficiently science-based and certain aspects, such as classifying gas-fired power, tree-burning, logging and nuclear energy as sustainable, could do more harm than good.

To create a more sustainable system for classifying investments, a coalition of experts and NGOs including WWF, BirdLife International, and Transport and Environment, formed the Observatory Against Greenwashing (OAG). The group aims to improve on the EU Taxonomy and provide investors with better, science-based guidance on the sustainability of their investments. 

What is the independent Science-Based Taxonomy?

The independent Science-Based Taxonomy is based on the EU Taxonomy, but it only keeps the portions of the text that researchers found to be environmentally sound. It also makes more robust criteria for the parts of the EU Taxonomy that the OAG deemed unscientific or harmful to the environment.

“The EU Taxonomy was originally designed to eliminate greenwashing but instead has become another tool to deceive consumers," Vedran Kordić, EU Taxonomy coordinator from WWF Adria, said in a statement. "The science-based Taxonomy wants to succeed where the original Taxonomy failed: It will create rigorous criteria which financial institutions can use to properly assess what is green and what is not.” According to the OAG, 1 in 3 activities deemed sustainable in the EU Taxonomy actually cause planetary harm. 

The EU Taxonomy was established in 2018 with a mission to inject capital into projects that would help the EU meet objectives laid out in its Green New Deal, including carbon neutrality by 2050. But critics argue the EU Taxonomy is disingenuous and fundamentally flawed due to the inclusion of natural gas and nuclear energy sources on its list of sustainable investment options.

“This isn’t good enough. We need a better taxonomy, one based on science," said Luca Bonaccorsi, sustainable finance director at Transport and Environment, a coalition of European NGOs working on transportation issues, in a statement. "Now the investor community has it.”

ESG regulations are expanding in the EU and beyond

While controversy continues to surround ESG regulation for financial products in the EU Taxonomy, the EU Commission is calling for an increase in regulation of other consumer goods and services in an attempt to respond to claims of bogus greenwashing. The EU has drafted a legal proposal that would require companies to provide scientific evidence to justify sustainability claims such as “carbon neutral” or “contains recycled materials." The draft rule also calls on EU countries to develop systems for evaluating the environmental claims of companies, including issuing penalties for businesses that do not comply. 

The expansion of ESG (environmental, social and governance) regulation is not limited to Europe. In the United States, the Inflation Reduction Act is expected to channel over $400 billion into clean tech companies over the next 10 years. Additionally, the U.S. Securities and Exchange Commission is expected to finally issue its climate disclosure regulations in April, several months later than planned. The new SEC rules, if issued, would require companies to make disclosures surrounding their climate-related risks, as well as their greenhouse gas emissions and those of their supply chains. 

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