What’s wrong with the EU’s new green investment rules?

If we want to solve climate change, we need to change where the money goes. And for that, we need rules.

The EU’s taxonomy for sustainable investment is critical in reaching the EU’s ambition of net-zero emissions by 2050. The taxonomy is essentially a sustainable finance rulebook, telling us what can be classified as a climate-friendly investment.

But so far, Brussels is facing resistance on all fronts. What’s wrong with the EU taxonomy and what is ClientEarth doing about it?

What is the EU taxonomy?

At this moment in our fight against climate change, the way money is allocated could be make or break. But how can we make sure that the money is directed towards climate-friendly projects, both targeting climate mitigation – such as renewable energy businesses – or working on adaptation solutions in areas hit hardest by climate change? The EU taxonomy was created to respond to these questions. It is a classification system, establishing technical criteria – for example the maximum acceptable amount of CO₂ emissions – for certain economic activities. When a listed economic activity complies with the taxonomy criteria it may be considered environmentally sustainable for investment purposes.

It aims to provide companies, investors, and policymakers with appropriate definitions for which economic activities can be considered ‘green’ in financial disclosures and reporting. In this way, it should create clarity for investors and companies about which activities are sustainable, prevent greenwashing, and help shift investments where they are most needed.

But in its current form, it’s failing on all counts.

Our legal action against the taxonomy

In June 2021, the first series of activities were labelled as sustainable in the taxonomy. This includes bioenergy, bio-based plastics, and chemicals used to make plastics – all of which can cause significant harm to the environment and climate. Then, in July, the European Commission added gas to the rulebook: a potent fossil fuel that threatens European energy security and has led to sky-high energy prices across Europe.

We believe these decisions violate the European Climate Law and the Taxonomy Regulation itself, and so turned to the courts. In September, we filed a legal action at the Court of Justice in the EU to challenge the European Commission’s unlawful decision to label bioplastics and the use of forest biomass for bioenergy as ‘green investments’.

Separately, we also started an internal review request against the inclusion of gas in the taxonomy, together with WWF’s European Policy Office, Transport & Environment and Friends of the Earth Germany. If the Commission refuses this request and fails to fix the legal violation, then we won’t hesitate to ask the court to step in – just as we did with biomass.

What’s the problem with biomass and bioplastics?

Scientists warn that burning wood for energy – which falls under the category of ‘bioenergy’ – has a severe environmental impact and is far from carbon neutral, producing more CO2 emissions than burning fossil fuels and fuelling logging linked to deforestation.

Our forests lawyer Jody Quirke said: "You cannot burn wood for energy without cutting down trees, encouraging forest destruction with huge costs for biodiversity, depleting our remaining carbon sinks, and increasing harmful carbon emissions in the atmosphere.  To encourage further investment in this practice by labelling it as environmentally sustainable is dangerously flawed and is not in line with the Taxonomy criteria.”

Similarly, ethylene, propylene and the other chemicals in question are made of fossil fuels and they are mostly used to make single-use plastics – which release carbon into the atmosphere after they are disposed of.

Our plastics lawyer Tatiana Luján said: “This Taxonomy Act, as it currently stands, will facilitate investments in the chemicals used to make plastics – therefore helping the fossil fuel industry crank out more and more plastic. These chemicals should not be considered ‘sustainable’ investments.”

Ultimately, this system for enabling ‘green investment’ is set to perpetuate the old model of funding climate harm

What about gas?

The name “natural gas” hides the truth about the environmental damage caused by this fossil fuel. Gas is natural in the sense that it naturally occurs within the Earth’s surface – just as oil and coal do. And like oil and coal, exploiting it and burning it has huge climate impacts: burning gas emits far more carbon dioxide than we’re led to believe, and is far more intense for the climate in the immediate term.

So if we keep burning it now, we’re actively locking in dangerous climate change.

But there is another threat: in the process of extracting, transporting, and distributing gas, potent methane – its main component – leaks into the atmosphere. Methane is a powerful greenhouse gas with a global warming potential 86 times that of carbon dioxide over a 20-year period.

Our lawyer Marta Toporek said: “Propping up gas, a fossil fuel which is currently at the centre of a cost of living crisis across the bloc, undermines the EU's fundamental aims of achieving cleaner, cheaper and more secure energy. To bring down people’s bills, secure energy supplies and protect citizens from climate chaos, the EU needs to stop greenwashing gas as ‘sustainable’ in the EU Taxonomy.

"The Taxonomy is supposed to be the gold standard for investments but, as it stands, this Taxonomy Act sends all the wrong signals to investors. It needs to be repealed."

We’re not the only ones sounding the alarm. Financial players are against the inclusion of gas in the taxonomy. The Institutional Investors Group on Climate Change (IIGCC), which has €50 trillion of assets under management, has repeatedly called on EU leaders to exclude gas from the EU Taxonomy, as it would undermine its credibility and the EU’s own net zero commitments.

The EU Commission’s own advisory body on the topic, the Platform on Sustainable Finance, has also slammed the European executive on a draft it received for consultation late in December. The 57-member body said it had "doubts about how the draft criteria would work in practice and many are deeply concerned about the environmental impacts that may result."

The EU Taxonomy beyond climate

In addition to climate mitigation and adaptation, the taxonomy will eventually cover water and marine resources, circular economy, pollution prevention and control, biodiversity, and ecosystems protection. That’s why it needs to be as robust as possible from the start.