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New Taxonomy Regulation to put a stop to greenwashing

8 min reading time

“Europe’s lowest fares, lowest emissions airline”. This was the claim that caused Ryanair to be heavily criticized in February this year. Because, as it turned out, Ryanair based its claim on a data analysis dating from 2011, in which many other airlines were not even included. Whether Ryanair really is the lowest emissions airline can thus be disputed.

Ryanair’s slogan is a good example of greenwashing: pretending to be greener or more sustainable than an organization actually is. This month, both ESMA and the AFM pointed out that the risk of greenwashing also exists in the financial sector. One of the ways in which the European Commission wants to fight greenwashing, is by introducing a new Taxonomy Regulation for sustainability. This Regulation will provide the legal framework to define what is a truly ‘green’ investment. In this article, we will explain the advantages and disadvantages of this Regulation and what it will mean for both investors and organizations.

Why should we put a stop to greenwashing?

The demand for ‘green’ investments is increasing. As a result, it is becoming more attractive for companies that are in fact not that sustainable at all, to present themselves and their projects as sustainable. This is risky, both for the company and for the investor. The company runs a reputation risk: society will become suspicious if it comes to light that the company is not at all as green as it claims to be. The investor, in turn, runs the risk of unconsciously investing in projects that he would have preferred to avoid.

Therefore, it is not surprising that over 120,000 European citizens called on EU leaders last year by means of a petition to prevent greenwashing.

What exactly does the Regulation say?

This Regulation determines in what cases companies can claim their economic activities are truly sustainable. The rules come down to this. The activity…

  • should contribute to one of the EU’s six sustainability targets (these six targets are all climate and/or environmental related);
  • must not be detrimental to any of the other sustainability objectives;
  • must meet International Labour Organization standards; and
  • must meet different technical assessment criteria.

So it’s actually quite simple: if you meet these criteria, you can use the sustainability claims mentioned in the Regulation. If you do not, you are not allowed to make claims about the sustainability of your activities.

What does this mean to you?

Are you an investor? In that case, it will become easier for you to separate the wheat from the chaff. If a company makes a sustainability claim that is mentioned in the Regulation (for example: “ecologically sustainable”), you will know exactly what this means.

Are you a company that provides sustainability information (such as an issuer or a fund manager)? From now on, you may no longer simply label your products as ‘sustainable’. First, you will have to check whether the activity in question actually meets the requirements of the Taxonomy Regulation, and make sure that you do not use any terms that you are not allowed to use. This will prevent compliance and reputation problems.

On the other hand, you can make the terminology work to your advantage. If you do meet the criteria for using the sustainability claims, you can more clearly differentiate yourself from parties that do not meet the criteria. Given the increasingly greener preferences of investors, this could make it easier for you to raise capital.

Harmonization or uncertainty?

First and foremost, the taxonomy can make an important contribution to the harmonization of sustainability claims and the prevention of greenwashing. Promotions such as ‘green’ and ‘sustainable’ are no longer empty words after the introduction of the taxonomy, but actually mean something. Unfortunately, we have also identified a number of drawbacks.

A first drawback is that a considerable amount of capacity and data will be needed to determine which claims can and cannot be made. Use of the taxonomy can therefore – especially for small parties – take quite a lot of effort.

In addition, the final technical criteria have not yet been determined. If these criteria leave room for different interpretations, it is possible that the taxonomy ultimately provides less clarity than initially intended.

Finally, for the time being, the taxonomy only monitors climate- and environment-related factors (the E-factor). However, if we want to prevent all forms of greenwashing, we will also have to attach conditions to claims relating to social (S) and governance (G) factors. This will also prevent investors from disproportionately allocating their assets to investments that score well in the E-field, leaving less capital for projects that are S and/or G-friendly. The European Commission has indicated that it will work on this at a later stage.

More information

Do you want to know more about the Taxonomy Regulation, or do you want advice about the provision of sustainability claims? We are happy to tell you more about the ESG legislations in the financial sector.

You can also listen to our podcast about this article.