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Financing sustainable growth: absence of clear-cut targets and criteria

Greenwashing: Need for systematic and effective monitoring of EU taxonomy

"To protect investors from financial products that are wrongfully labelled as sustainable, the federal government must ensure effective monitoring. Assurance must be provided that financial market actors comply with the requirements set by the EU taxonomy for sustainability and transparency," said Kay Scheller, President of the German SAI when presenting a report on steps taken by the government on the EU Commission's Action Plan for Financing Sustainable Growth. "Facts suggest that the domestic financial supervision function is not able to conduct a systematic review of the EU taxonomy. This is where the federal government must step in. If a financial product is labelled as 'green', the investor needs to be able to place reliance on this statement."

Our report studies the sustainable finance strategy of the federal government and examines if the government adequately safeguards Germany's sustainable finance interests at Union level.

Protect investors from greenwashing

The EU taxonomy is designed to protect investors from financial products that are wrongfully marketed as sustainable, a practice known as greenwashing. Greenwashing means that a product is labelled as sustainable although in reality it is not. The EU taxonomy will only be successful if investors can be effectively protected from greenwashing, and if funding is fully aimed at products that are sustainable and that have been duly substantiated. We feel there is an urgent need for systematic monitoring of the proper application of the EU taxonomy. The government has raised doubts that the financial supervision function is fit for this purpose. This is intolerable. The government must ensure that the Federal Financial Supervisory Authority acquires the professional expertise and skills and the resources needed to perform this task effectively.

Limit the EU Commission's headroom on industrial policy – give a greater say to EU member states

We are concerned that the EU Commission has large flexibility and headroom in implementing the taxonomy. The EU Commission defines the criteria for financial market participants to assess to what extent an economic activity or an investment qualifies as "sustainable". To this end, the EU Commission may set thresholds and limits covering a wide variety of economic sectors, e.g. for carbon dioxide emissions or energy consumption. In this effort, the Commission also seeks advice from interest groups. "The EU Commission has wide powers in this field," Kay Scheller said. "The Commission may even classify entire industries as unsustainable and exert influence on shaping the industrial policy landscape in the EU member states. This is not reasonable. In addition, lobby groups are given too much influence over the technical screening criteria. The EU member states need to have a greater say in this exercise."

Complement national sustainable finance strategy by specific targets and measurable criteria

When developing the sustainable finance strategy in 2019, the government proclaimed the goal of making Germany a leading hub for sustainable finance. "The government has not defined what this exactly means," Kay Scheller noted. "Nor has the government stated the criteria Germany must meet. As a matter of fact, the strategy lacks specific targets and measurable criteria. Only once the government has defined the major requirements to be met to become a leading hub for sustainable finance, it can provide assurance on whether the steps taken in the course of the strategy have been successful."

With the taxonomy, the EU legislator seeks to protect investors from financial products that are wrongfully labelled as environmentally sustainable (greenwashing). According to the EU Regulation, financial market participants, such as investment fund managers that market environmentally sustainable assets, use mandatory criteria to assess whether an economic activity or an investment is "sustainable". To enable this assessment, financial market participants need relevant information from the companies whose financial products they market. In addition, fund managers shall provide investors with transparent information on the sustainability of such financial products.

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