The growing hordes of EU bureaucrats continue to generate “one-size-fits-all” policies and regulations that lead to more red tape, higher compliance costs, more corporate monopolies, and more curbs on the free market. This generally, ultimately results in the opposite of what these well-intentioned worker-bees profess to be striving for: equality, social justice, sustainability and other noble pursuits. The EU economy has become a planned economy. And, that trend is not going to revert anytime soon. In fact, it is actually accelerating with the bureaucrats’ latest offensive, this time under the banner of “ESG”.
Centralist policies and regulations lead primarily to one thing: the accumulation of power by the central government. The trend toward a more centralist (French-style) governance has been underway in the European Union for several decades. The COVID interventions – lockdowns, relief packages, fiscal and monetary stimulus – during 2020 have accelerated this shift of course.
TOP TEN - Public spending ratio in the member states of the European Union in 2020
From the free market to a planned economy
As the public share of GDP, i.e. the public spending ratio or percentage of government expenditures relative to the gross national product, grows and the private sector is increasingly crowded out, the overall competitiveness and resilience of an economy weakens. That trend exists in the West in general. However, the European Union has certainly taken the lead.
At the end of 2020, that figure stood at an astounding 55%! France, at this point, is the champion of public spending with a share of the French economy (GDP) at a whopping 63%. When government spending makes up more than half of the economy, that is, by definition, a planned economy. Free markets no longer exist in most western countries.
Switzerland, which still benefits from a relatively free-market-friendly regime, is a rare exception in Europe, but it too saw an increase of public spending from about 31% to 37% in 2020.
Meanwhile, China currently stands at roughly 36%! Arguably we have now reached a point where, despite its communist one-party rule, China has more of a free-market economy than the western world. That is a real concern!
Centralist bureaucracy is on the rise in Europe and now, under the Biden administration, in the US as well. Policy debates are revolving around topics like gender equality, climate change or white supremacy and racism, while China is strategically, step-by-step, taking the lead economically and politically.
Bureaucrats and politicians are gaining in power. As they do, entrepreneurs, SMEs and voters lose out. The only winners in the private sector are big corporations and the swelling ranks of compliance officers and attorneys. The “industry” of corporate law and compliance is one of the fastest growing sectors in the West.
While the Chinese education system produces staggering numbers of engineers, mathematicians, physicists and other scientists that will strengthen the country’s strategic drive toward technological leadership, Europe is producing compliance officers, attorneys, accountants, auditors, and, of course, a new breed of “social warriors” and countless NGOs.
Irrespective of where you stand ideologically, it is clear that this trend will not help the West compete with rising China. Instead of stepping up and giving China a good and fair fight in the global economic arena, the West – now led by the Biden administration – prefers to point fingers and make stern statements against Chinese human rights abuses. Instead of defending its economic position in the world, the West is busy defending its moral and ethical high ground, by rolling out more and more well-intentioned but completely ill-advised feel-good policies.
The latest poster child: Europe’s ESG Taxonomy
“Do No Significant Harm”, or “DNSH" in short, is Europe’s latest environmental mandate. Channelling a new approach for the evaluation of ‘green’ and ‘sustainable’ business activities, the regulation is all set to shape international finance for years to come. There have been several recent developments in the EU, ranging from townships and factories to wind farms and electric vehicles, all of which have branded themselves as “sustainable finance” ventures, garnering billions of dollars of investments.
The question is, who decides what is sustainable and what is not? Possibly the unassailable duo of powerful bureaucracies and big corporations?
With the EU stepping into action mode on sustainable finance, it has begun to enforce its “Sustainable Finance Disclosure Regulation”. Fund managers are now being asked to report all the “socially conscious” steps and measures they take for addressing environmental, social, or governance (ESG) concerns.
However, this is not all. The EU also plans to amend the 2014 rules requiring reporting by all financial and non-financial companies on ESG issues. The draft of the Non-Financial Reporting Directive is set to be released soon, and the topics it could encompass include human rights, gender equity, sustainability efforts, corruption, bribery, and more.
According to many analysts, this can have a similarly distracting and burdening impact on businesses as the EU’s 2016 General Data Protection Regulation (GDPR) had, creating a “ripple effect” and imposing disclosure burdens on companies worldwide.
One of the problems, of course, is that these complex topics are not easily standardized and quantified. Using sustainability as an example, several industry experts, government officials, NGOs, as well as other stakeholders have been trying to develop a method to measure it in quantifiable and objective terms. This has been branded as the “Green Taxonomy”.
The Green Taxonomy refers to a vast, structured classification method for evaluating all kinds of business activities, products, and materials against a set of codified standards. The goal is to come up with a unified system similar to the Generally Accepted Accounting Principles used in finance, or in other words, to support the so-called sustainability regulations the EU has developed. This rigid virtual reference library will then be used to define terms and phrases used in reporting procedures, as well as product and service documentation, including “sustainable contribution”, “significant harm”, and “environmental objectives”.
We are examining whether it is possible to create a social taxonomy and whether, in addition to having substantial contribution, this idea of a positive or green taxonomy, we should also have a criteria for identifying significant harm so that the taxonomy would have two functional criteria for every activity.
~ Nathan Fabian, Chairperson, The European Platform on Sustainable Finance
The EU has set up an expert group under its Green Taxonomy regulation, the “European Platform on Sustainable Finance”, that is responsible for crafting policies and chalking out the research, details, and guidelines of the standards. This expert group is to include notable contributors from different fields – corporates, the financial sector, academia, and civil society. At the same time, the panel is to be subdivided into six smaller groups, each focusing on different issues such as environmental screening, data quality, and monitoring of capital flows.
Such a standardized taxonomy will not only help the EU convey what its crafted principles mean but will also pave the way for turning them into regulations, laws, and policies. The idea behind this initiative is to provide investors with a sharp overview of a project’s “sustainability quotient” to encourage funding and participation.
Some specific objectives include augmenting biodiversity, achieving net neutrality on greenhouse gas emissions by 2050, and becoming a market leader in green technology, such as electric vehicles, wind, and hydroelectric power. However, the irony is that these so-called “sustainable development” projects can cause more harm than good if allowed to do whatever they want with the sole goal of getting that “green sticker” from the bureaucrats.
A hydroelectric power generation project might, on paper, be a low-carbon technology. But think of the repercussions it has on a river’s natural course and therefore, the settlements around it, on surrounding forests where trees are cleared by the thousands, and on the land downstream which now has higher chances of getting flooded. Such a project can reduce biodiversity, negate the reduction of carbon dioxide levels, and cause irreparable damage to the geology of the place it is located in, probably inducing worse disasters.
Wind farms and solar energy projects are no different; they can cause severe disruptions if not built to suit their local micro-context and regulations.
Green or Grey?
The imposition of the EU’s Green Taxonomy will require multiple companies to disclose reports on ESG concerns and how their businesses comply with the standards, starting January 2022. Come 2023, reporting requirements will see further additions, stricter details, and greater refinement.
But there is still a lot of confusion and many questions vexing investors and companies. For instance, how should natural gas be treated? It is less polluting compared to coal and petrol, but it also releases harmful greenhouse gases. The Taxonomy proposes to classify new gas plants as “green”, if they meet certain requirements – a dangerous incentive according to some. Politics and lobbying seem to be prevailing over science, according to a growing number of scientists, environmental and consumer experts.
The taxonomy is going to evolve and keep getting more and more intricate in the months and years to come, just like the environmental challenges that the world faces today. It is also very likely to be adopted by other developed economies, the US included, not because it is a great solution for the environment, but because it promotes bureaucracy and furthers corporate interests.
The Biden Plan
Biden’s government has not just shown keen interest in ESG reporting after the EU’s nightmarish solution, it has also come up with multiple “back-to-the-future” plans on green energy subsidies. His mislabeled “Infrastructure Bill” includes spending hundreds of billions on selective green technologies, such as wind farms, electric vehicles, and hydroelectric projects.
The definitions of “sustainable” seem to be very close to the EU’s bureaucratic take, ignoring the potential of natural gas, nuclear power, and even effective urban planning interventions, such as TOD and zoning reforms. Instead of working out a carbon tax to curb the use of fossil fuels scientifically and cost-effectively, the Biden administration plans on a big corporate tax hike and subsidies on loosely defined “green projects”.
The Bottom Line
If governments are really bent on phasing out fossil fuels, imposing social and environmental responsibility on corporates and individuals, or promoting “green” and “sustainable” development, they need to abandon their one-size-fits-all approach of more and more taxation. These efforts should be aimed at protecting the world, and not certain corporate giants.
Policy interventions that are crafted based on a bottom-up instead of a top-down approach will lead to better regulations and legislation. Such interventions have the potential to shape not just regional, but also international finance, so they better be well thought out and evidence based.