Tough decisions: Finding the middle ground with the EU taxonomy

Refinitiv's Detlef Glow says the market will end up making the decision for regulators

The proposal by the EU Commission to classify some activities in gas and nuclear energy as eligible for sustainable investments within the new sustainable finance taxonomy—since they may be needed for the transition to a low carbon emission economy—faces strong headwinds from local EU governments, subject matter experts, and industry participants.

While common sense agrees with the critics who claim that those technologies are in general not sustainable, one needs to bear in mind that the policymakers would need to keep an eye on the overall effect.

Firstly, the EU Commission needs to find a middle ground and a wording that would allow a new regulation to pass the European Parliament and the European Council.  This seems to be a very challenging task in its own since the positions of the EU member countries on these topics differ widely.

Secondly, policymakers need to ensure that the inhabitants within the EU have reliable and affordable access to electricity during the transition and afterwards. Since prices for electricity in several EU member states have gone up dramatically over the course of the last 24 months, this has become a threat for the EU Commission. This is because it has become clear that this price increase is driven by a mismatch between the closure of nuclear and fossil energy-based power plants in the race towards a low carbon economy and the real demand for energy within the single EU countries.

In fact, the increase in prices for energy was a strong driver of rising inflation and forced some EU countries to act to cushion the price rise, as more and more households can’t afford these costs anymore. This means the respective countries have to find a trade-off between the E (environmental) and the S (social) of ESG to achieve their carbon emission goals.

Don’t get me wrong, I am not saying that nuclear or gas should be considered generally as green energy sources at all, but from my point of view Europe will need some more time to replace fossil energy sources with renewable energy. To be clear, I think it is necessary to make tough decisions to achieve the carbon emission goals and to fight climate change, but decision makers also need to take the economic impacts on corporations and citizens into account when making these kinds of decisions. With regard to this, I can understand the position of the EU Commission. At the same I can also understand the position of Austria, where nuclear power is banned since 1978, and Luxembourg, as well as the positions from non-governmental organizations (NGOs) and other organizations. However, we need to find a workable middle ground to make any progress at all, all parties need to review their positions and adjust them respectively as this project may fail otherwise.

In addition, one needs to bear in mind that the member countries in the EU can set additional stronger regulations as long as these rules do not undercut the EU regulation. That said, such an additional local regulation would lead to a new regulatory patchwork, which the EU Commission wants to avoid transposing its single market strategy further.

See also: – Investors warned using gas and nuclear is ‘greenwashing’ despite EU taxonomy guidelines

I strongly believe that investors will make careful decisions once they know exactly what their funds hold. This means that transparency about the percentage invested in nuclear and/or gas would be key for investors to make informed decisions. It may turn out that investors favour nuclear and gas or that they avoid funds investing in these technologies by pulling money out. Additionally, local regulators can steer institutional fund flows from pension funds, foundations, and insurance companies with respective regulations.

Therefore, I am pretty sure that the market will make the decision for the regulators if the transparency of the fund portfolios is high enough. Higher transparency for mutual funds is another tough call to make for the EU regulators, as this is not in favour of the fund management industry and their mighty lobbyist groups.

The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.