EU April 2021 Package on Sustainable Finance: Green Stewardship or ‘Chronicles of a Death Foretold’?

This blog post is based on the intervention of Daria Davitti in the webinar on Corporate Due Diligence and Sustainable Finance organised by the Nova Centre on Business, Human Rights and the Environment with the support of the Portuguese Presidency of the Council of the European Union in partnership with the British Institute of International and Comparative Law, the Portuguese Ombudsman (Provedor de Justiça), the Teaching Business and Human Rights Forum, and NOVA 4 The Globe on the 27th of May 2021.

About the authors:

Dr Davitti is Associate Professor (docent) at the Faculty of Law, Lund University. Her research lies at the intersection between international human rights law and international economic law, and currently focuses on the human rights implications of refugee finance and climate finance.

Arınç Onat Kılıç is a graduate from the International Human Rights Law master program at Lund University. In addition, he worked as a research assistant to Assoc. Prof. Daria Davitti and Dr. Britta Sjöstedt at Law Faculty in Just Transition project. In September 2021, he will start doing a PhD in Antwerp University with a particular focus on sustainable finance in the blue economy.

Policy makers and researchers have, by and large, welcomed the adoption by the European Union (EU) of the European Green Deal and its much-needed objectives: to achieve a reduction of greenhouse emissions of at least 55% by 2030 compared to 1990 levels, and EU climate neutrality by 2050. The various measures envisaged to implement the European Green Deal will have significant implications for states, business enterprises and financial institutions alike, as clearly demonstrated by the release of the EU April Package on Sustainable Finance on 21 April 2021 and its subsequent updates. The April package aims at re-orientating investment towards sustainable economic activities in order to realize the objectives of the European Green Deal. Our research, carried out as part of the Just Transition project at Lund University, indicates however that some of the measures enshrined in the April Package on Sustainable Finance will exacerbate, rather than alleviate, the challenges we face in order to achieve climate neutrality. In this contribution, we examine three key problematic aspects of the April package, by way of shedding light on the changes that will be needed to successfully achieve the objectives of the European Green Deal, while we still can.

First, to contextualize and justify our claims on the dissonance between the objectives of the European Green Deals and the measures of the April package, it is important to note that, at this stage, any climate policy adopted will have to be science-based. In other words, as the science is clear that if we want the planet to stay within a warming of 1.5º C, what is required is a decrease in fossil fuel production by 6% every year in the period 2020-2030. Governments, however (and the measures enshrined in the April package unfortunately confirm this trend) are planning to increase fossil fuel production by 2% every year. This will double, rather than drastically reduce, the levels of fossil fuel production needed by 2030 in order to be on track for a consistent limitation of warming to 1.5º C. With its aim of reorienting investment towards sustainable economic activities, the April Package is strictly linked to the EU Taxonomy Regulation (EU Taxonomy) which in turns provides the criteria to identify ‘sustainable’ economic activities. The Climate Delegated Act, released as part of the April Package, is important because it includes the technical screening criteria for activities which are ‘sustainable’ in terms of climate change mitigation and climate change adaptation.

Various scientists and civil society’s organizations have been very vocal about the risk of greenwashing posed by some of the EU Taxonomy measures, both in terms of (lack of) effective climate action and human rights protection. As identified in our research, the three key problems presented by the April Package are posed by the fact that (1) the Climate Delegated Act paves the way to accepting natural gas a transitional fuel; and that (2) bioenergy and (3) forest management are considered sustainable activities, despite their known adverse impacts on other planetary boundaries, such as biodiversity. The greater risk, of course, is that instead of effectively reducing fossil fuel production, we are locking in longer-term reliance on them for the next 10 to 30 years. Furthermore, the identification of controversial economic activities as ‘sustainable’ to appease the concerns of certain EU member states will not help achieve the objectives of the European Green Deal, let alone a truly Just Transition.

Although the implications of the April Package for the financial sector might not be immediately obvious, they are significantly far-reaching. As we all know, the EU Taxonomy and its technical screening criteria are hailed as a benchmark for Environmental, Social and Governance (ESG) standards worldwide. The Climate Delegated Act, and the other EU Taxonomy delegated acts that will follow, are of fundamental importance for the way in which business will be reporting on corporate sustainability (see the April package proposal for the Corporate Sustainability Reporting Directive). In turn, under the Sustainable Financial Disclosure Regulation which came into effect on 10 March 2021, disclosure information based on the screening criteria will also feed into financial sector’s disclosure.

What we see, therefore, is the creation of a very complex governance infrastructure, or rather, a technology of governance which sets out a longer-term framing of non-protection. Thus, whilst it is true that the EU is taking the lead on climate action and sustainable finance, it is also true that it is setting the bar far too low for effective climate action and human rights protection to be achieved. Science-based policy making is now our only tool to ensure that we limit the catastrophic consequences of climate change; and, although the EU Taxonomy delegated acts can be amended, every year spent without pursuing effective climate action is a year too late to save this planet, the species inhabiting it and future generations.