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The EU’s Risky Green Taxonomy

The European Commission's so-called “taxonomy” for classifying green investments should address three important questions. Unfortunately, the Commission's one-dimensional approach disregards two of the three, with potentially damaging consequences.

PARIS – European Union member states and the European Parliament are soon expected to adopt a so-called “taxonomy” for classifying green investments, after reaching agreement last month on a list of “sustainable” economic activities. Once the new system enters into force, most likely this year, the European Commission will use this list to determine which financial assets and products are sustainable.

This taxonomy is the backbone of the Commission’s regulatory package on sustainable finance, which has the ambitious goal of “reorient[ing] capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth.” The Commission hopes that the new labeling scheme will address the problem of market players “greenwashing” non-sustainable financial products and serve as the basis for policy incentives to promote sustainable investment.

To be fit for purpose, however, the taxonomy must address three important questions. Unfortunately, the EU’s one-dimensional approach disregards two of the three, with potentially damaging consequences.

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