The EU’s controversial decision to reclassify nuclear and gas power as green activities under the bloc’s green taxonomy has thrown its flagship green fund label project into disarray. The project will now be put on hold until the move is official confirmed, RI can reveal.
The decision was announced in a closed meeting of the European Commission’s EU Ecolabelling Board – a body which oversees the EU line of green consumer labels – last Wednesday. Notes from the meeting will only be published in May.
While it has not received as much attention as the EU’s other sustainable finance initiatives, the Ecolabel project is the only one to focus on greening products in the retail investment market. It is the first time that the Ecolabel – an existing EU certification awarded to consumer products with class-leading environmental standards – is being extended to include financial products.
The EU’s co-legislative bodies, comprising member states represented by the EU Council and Parliament, currently have four months to veto draft law integrating nuclear and gas power into the green taxonomy before it enters into force. The first parliamentary debate on the subject will commence this week.
Although it is widely expected that the law will pass, it is not a foregone conclusion due to enduring concerns over the environmental harms associated with both power sources. Some MEPs and the Austrian state have already indicated plans to mount legal challenges against the proposals.
But the EU could find itself in another difficult position if it decides to revise the Ecolabel in line with the amended taxonomy. Under the label’s current draft criteria, Ecolabel-badged funds are banned from investing in nuclear and gas power – removing this red line could trigger yet another pushback from sustainability-minded investors and NGOs seeking to maintain the label’s green credentials.
It is the latest in a series of challenges – described internally as an “ambition dilemma” – which has dogged the Ecolabel working group from the start, resulting in a protracted development phase and multiple missed deadlines. Since work kicked off in 2019, members have struggled to establish an eligibility criteria which strikes a balance between aligning with class-leading environmental standards and being suitably attractive for broader market adoption.
Insiders previously told RI about pressure from asset manager representatives within the working group to loosen minimum green requirements, and ease sectoral exclusions and mandatory requirements. It was also revealed that BlackRock had proposed a minimum threshold of just 25 percent green assets for a fund to qualify for the label.
However, this has received the unlikely backing of some responsible investing heavyweights in recent months who say that a more forgiving criteria which would allow for additional diversification, making certified products more suitable for potential investors.
Last year, Eurosif head Victor van Hoorn said: “This is an opportunity for EU policymakers to hit reset and rethink the Ecolabel criteria because as it stands, there is a real danger that the proposals are too stringent. Fund managers will struggle to build portfolios complying with the label and having a level of investment risks suitable for retail investors.”
On the other hand, NGOs and some progressive lawmakers have demanded that the criteria is strengthened even further, warning that the current proposals carry “a real risk for greenwashing financial products, misleading consumers and harming the reputation of the EU Ecolabel scheme beyond finance”.
There have also been concerns over the Ecolabel’s complexity – according to its current draft, the ‘greenness’ of a company is to be assessed according to a newly-proposed proprietary formula based on green turnover and historical CAPEX. Some have instead suggested that the EU develops criteria based on its Article 8 and 9 designation for ESG funds to underpin an alternative green label.
“The EU should urgently look at creating a green label for Article 8 and 9 funds as it is something the market is familiar with, rather than trying to push through the planned Ecolabel criteria, which is exceedingly complex and hard to understand,” said Phillipe Zaouati, the CEO of Natixis-owned SRI manager Mirova.
Prior to its suspension, the Ecolabel project was in its final stages, pending only the official sign off from the Ecolabelling Board and EU co-legislators. The Ecolabel was scheduled to be adopted by end-2020 according to the project’s initial timeline.