Finance

Politicians can’t keep ducking the tough decisions on climate change

If Boris Johnson was still a Brussels-mocking reporter on TheDaily Telegraph, he could hardly wish for a better example of the EU’s dysfunctional policy-making than the green taxonomy. It makes his fantasy story about banning bent bananas look like a model of good governance.

Designed to help channel investment towards sustainable activities, the taxonomy has suffered from all the problems that bedevil EU rule-making. Critics warned that assessing every type of economic activity to determine whether it is green or not was wildly over-ambitious and would be so time-consuming that it was bound to be out of date before it was finished.

Experts such as Ben Caldecott, founding director of the Oxford Sustainable Finance Programme, said it would be too inflexible, would discourage ambition and risked inflating a green bubble. He also warned that the process would get bogged down in lobbying by corporate vested interests and the political pressures on EU member states.

Boy was he right. The taxonomy is already way behind schedule thanks to wrangling over the treatment of politically sensitive issues such as nuclear power, natural gas and biofuels. In time-honoured fashion, the European Commission has now delayed decisions on nuclear and gas until after the summer.

This is a complication for the UK, which wants to publish its own version of the taxonomy before the COP26 climate conference it is hosting in Glasgow in November. Caldecott says it is vital that the UK taxonomy is more rigorous and robust, and predicts that many financial firms and clients will opt for the higher UK standards: “This is an easy win for the UK in an area where we have a clear interest in seeing the adoption of more stringent standards globally.”

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Caldecott’s research shows that the financing costs of fossil fuel projects, particularly coal, have risen sharply in recent years, as financial institutions have become more nervous about the risks. The application of green taxonomies will help this process, changing the cost of capital and so pushing investment towards more sustainable activities.

But it is worth pausing for a moment to consider why this whole elaborate structure is necessary.

When societies decide they want to shift private sector activity in a certain direction, the usual approach is for governments to apply taxes and subsidies or direct regulation. They don’t leave it up to investors.

If we want to discourage people from making and buying sugary drinks, we put a tax on sugary drinks. We don’t hope the change will somehow follow if investors buy shares in companies that make fewer sugary drinks and sell shares in companies that make more sugary drinks. If we want to reduce the amount of nicotine in cigarettes — as the Biden administration is contemplating — we don’t rely on investors to put pressure on the manufacturers, we introduce regulations forcing manufacturers to reduce the amount of nicotine.

This is the right approach, not least because investor action is pretty ineffective. Many investors have been boycotting tobacco companies for years and there is little evidence it has made any difference.

The other reason governments need to take the lead on such issues is that the choices should be made by elected politicians, not by unelected companies and investors. We don’t want companies and investors deciding what level of nicotine in cigarettes is right — that is a job for governments.

Financial firms are increasingly expected to make judgments on a wide range of social and political issues and to guess how these will play with their stakeholders. Barclays has just discovered that funding private prisons for the state of Alabama is not okay, for example. And JPMorgan has found itself a pariah by misreading the politics of European football.

Fair enough, perhaps. But when it comes to possibly the most important issue of the age — climate change — the private sector should not be making the calls. It shouldn’t be up to investors to decide whether gas or nuclear is better for the planet, or when coal-use should end.

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If governments applied carbon taxes that incorporated the real costs of climate change, companies and investors could respond to the price signals in the normal way. But governments don’t because they fear it would be too unpopular. If the EU countries have struggled to agree on the taxonomy, imagine what it would have been like if they had been talking about taxes.

At least the taxonomies will give investors some guidance. But if the UK really wants to be taken seriously at COP26, it needs to do more than complete its own version. It will have to start introducing concrete policies that will deliver the ambitious targets it is setting. Some of those policies will be unpopular, but politicians can’t just keep hoping that the financial sector will do all the work for them.

To contact the author of this story with feedback or news, email David Wighton

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