What will be the big issues for sustainable finance in 2023? Luca Bonaccorsi at Transport & Environment points at four. Firstly, the EU Taxonomy defines what counts as “green” investment. There has been much criticism of the inclusion of gas, and critics will continue publishing their analyses of what is truly sustainable and what is greenwash. Next, ESG ratings have also been severely criticised. They are an investor’s main tool for capital allocation. Yet they prioritise the measurement of risk for corporations over sustainability, explains Bonaccorsi. In September T&E published their study that revealed that lifetime CO2 emissions only represent less than 1% of a carmakers’ final ESG score. Thirdly, new “corporate sustainability disclosures” will become law in 2023. The EU will hold corporations and financial institutions to account with the world’s broadest and most solid set of performance measures. But what level of enforcement will there be? Finally – and this is the most encouraging – Europe’s response to the President Biden’s Inflation Reduction Act which delivers considerable new funding to U.S. clean energy. To not fall behind in green economy competitiveness, let alone decarbonisation, Europe must, and hopefully will, come up with the funding it needs to invest in climate neutral technology, says Bonaccorsi.
The Green Taxonomy
No one wants to hear about the EU taxonomy anymore: not the bankers, the donors… least of all my colleagues in the communications department. It’s an orphan file. Not hard to understand why: three years revelling in the idea the EU would set in stone true green activities, then the slap in the face with the gas-scam. Now everyone avoids it, like an unpronounceable love gone wrong.
And yet the Taxonomy is here to stay, as the official EU definition of what’s green. It will affect a number of files in private and public finance, starting with the new “Growth and Stability Pact”. Now more than ever, it’ll be crucial that independent experts shed light on what is truly sustainable, and what is pure greenwashing. This void will be filled by NGO experts, including T&E, who will publish the independent science-based Taxonomy in January, on greenwashed.net. Watch this space.
2023 is likely to be the year of another big battle: ESG ratings. These ‘sustainability scores’ are so unreliable, that they anger both the left and the right.
But we’re entering a tricky battle. ESG ratings are investors’ main tool for capital allocation. They will be hard to fix. The EU seems intent on regulating the industry and putting an end to the wild west of misleading standards that allow Shell, an oil company, to boast a higher sustainability score than Tesla, a company that makes EVs using renewables.
ESG ratings have two fundamental issues. First, they mostly measure risks for corporations, but say very little about the impact corporations have on nature and people and second, they systematically fail at giving the right ‘weight’ to sustainability matters. In a study published in September we exposed the fact that lifetime CO2 emissions (a pretty important metric), only represent less than 1% of a carmakers’ final ESG score.
The EU has set out to address both flaws; how successfully remains to be seen.
Corporate sustainability disclosures
But 2023 will also be the year in which the new corporate sustainability disclosures become law. Corporate disclosures are really important in revealing a company’s true climate impact. Disclosure of Scope 3 (lifetime emissions) will hit transport polluters particularly hard as the majority of a car, truck, plane or ship’s emissions come from its use, not in making it.
On paper the recommendations of the EU’s expert group, Efrag, will hold corporations and financial institutions to account with the world’s broadest and most solid set of KPIs.
That’s the ambition at least, but we know what happens to environmental ambitions under Commissioner McGuinness. Her legacy risks being really catastrophic for the EU sustainable finance agenda.
Europe’s response to the US Inflation Reduction Act
But not all is dark and gloomy. A very important debate is dominating EU public finance: Europe’s response to the US Inflation Reduction Act (IRA).
When Macron and Merkel agreed, back in 2020, to issue EU bonds to save weaker members of the union from the damage of Covid, it was clear that it was going to change the role of EU institutions for good.
And in fact here we are, still wrestling with the remains of the pandemic, already planning for another large deficit spending package, funded by bond issuance. This is a golden opportunity to give the continent the funding it needs to invest in climate neutral technology.
The very idea is a sign of political and cultural maturity for the Union. Goodbye WTO orthodoxy, austerity and self interest. Hello industrial policy, deficit spending and mutual support.
One thing to really look forward to.
Luca Bonaccorsi is Director, Sustainable Finance and Digital Engagement at Transport & Environment
This article is published with permission