Brussels The furore surrounding the EU Commission’s “green” taxonomy, a classification system for financial markets, has not yet subsided. Nevertheless, preparations are already underway in Brussels for a project that is no less explosive: the “social” taxonomy. The project aims to assess not only the climate but also the social compatibility of investments.
This should steer private capital to where it will be of the greatest benefit to people and nature. Critics see this as an attempt to divide the economy into good and bad – and fear serious competitive disadvantages for European industry.
A panel of experts, the “Platform for Sustainable Finance”, has prepared a report on the social taxonomy on behalf of the EU. The document classified as “confidential” is available to the Handelsblatt.
The authors see the “high demand” for bonds to finance social housing or health projects as a clear sign that “investors see social investments as an opportunity and that private capital can be channeled into socially valuable activities”.
That sounds indisputable, but the social taxonomy causes great nervousness in individual sectors. Defense companies in particular fear that their borrowing costs will rise significantly.
Blacklist for harmful activities
Because the EU experts want to create a negative list for socially harmful activities in addition to a positive list for socially useful investments. According to the plans, the latter should not only include internationally banned weapon systems such as poison gas, anti-personnel mines and cluster bombs.
The negative list should not only include internationally banned weapon systems such as poison gas, anti-personnel mines and cluster bombs.
(Photo: dpa)
“Investments in other armaments that can easily be used by child soldiers or are exported to conflict zones” could “be viewed as socially harmful,” the experts write. This passage allows for a very broad interpretation – and could lead to all possible defense companies getting financing difficulties.
“This vagueness is problematic,” confirms Matthias Wachter, defense expert at the Federation of German Industries (BDI). “It allows a high degree of interpretation and thus also a certain arbitrariness.”
From the point of view of the BDI, a classification of the security and defense industry as “socially harmful” is only justified for the weapons banned by the United Nations. In principle, however, the industry should be included on the positive list of the taxonomy in order not to be “disadvantaged on the capital market”, argues Wachter. This is justified because the industry “contributes to securing peace, freedom and democracy in Europe”.
Read more: The EU taxonomy creates more green confusion than transparency for the financial industry
The formulations in the taxonomy report are still proposals, not an official decision. However, experience with the “green” taxonomy shows that the input of the experts is trend-setting.
Next taxonomy dispute is imminent
Most recently, the EU Commission decided to classify natural gas and nuclear power as sustainable under certain conditions. A move that provoked fierce criticism from environmentalists and serious conflicts between member states.
The EU Commission classifies nuclear power and natural gas as sustainable
Now the next taxonomy dispute is pending. If the EU, after gas and nuclear, also declares armaments to be sustainable, a storm of protest is likely to break out, especially in the case of peace initiatives. The Commission finds itself in a dilemma.
The German armaments industry in particular will be affected by the Brussels decisions because it is in private hands. Companies like Rheinmetall, Diehl and Thyssen-Krupp Marine Systems have to assert themselves in the market. This only applies to a limited extent in other EU countries. The state has a stake in important French arms manufacturers such as Naval and the Thales Group.
The financing conditions of German armaments companies have already deteriorated, as the industry warns. Some banks avoid companies that derive more than 20 percent of their revenue from arms deals. This reduces the competitiveness of the industry.
Especially at a time when the risk of war in Europe has increased, the Brussels plans are fueling considerable uncertainty. The Commission agrees that the security environment in the EU has deteriorated significantly. Commission chief Ursula von der Leyen said in an interview with the Handelsblatt last week: “We are experiencing a deployment of Russian troops around Ukraine that has not been seen for 70 years.”
“Subjective conceptions of social justice”
It is also completely unclear how the Commission intends to reconcile the social taxonomy with the vision of a European “defense union” that von der Leyen is promoting with French President Emmanuel Macron.
MEP Markus Ferber (CSU) warns: “If you look at the current drama about the ‘green’ taxonomy, the Commission and the platform for sustainable financing would be well advised not to open the next barrel straight away.”
In the case of the “green” taxonomy, at least “objective scientific criteria” could have been used. Now it’s about “subjective ideas of social justice” – so even more controversy is programmed.
Ferber is certain: “Social policy issues should be resolved through social policy and not through financial market regulation. New classification systems only create new reporting requirements and bureaucracy, but no improvement in working conditions.”
More: Do we need gas and nuclear power to achieve the climate goals? – The EU Commission says yes