DFIs warn 'impractical' EU Green Deal rules will harm global south

New European Union Green Deal rules will harm low- and middle-income countries by miring potential investors in “impractical” red tape, an alliance of development finance institutions has warned. The bloc argued that its package of “sustainable finance” regulations — brought together in a 2021 strategy — can “accelerate private financial flows” while also achieving “a green, just and resilient recovery in our partner countries.” Many of those regulations are either now taking effect or will soon kick in. But the EDFI Association, representing the private finance arms of 15 European governments, said the rules will backfire in LMICs, where they primarily invest — because investors will be unable to obtain all the data they will be required to disclose. The damaging impact will be a slowdown in investment and even a decline in environmental and other standards, the association said, because “Europe’s influence on standards evolution in developing countries will also wane.” “The regulations are good and well-crafted, when applied to the European marketplace,” James Brenton, EDFI’s sustainable finance and impact adviser, told Devex. “But we are European investors who don't invest in the European marketplace, so we find ourselves subject to regulations that have clearly not been written for the places where we actually work. That's where the challenges come in.” Brenton said the full impact of hundreds of pages of complex regulations that are “impractical” in LMICs was only beginning to sink in, as they were explained to fund managers, clients, and suppliers. “You would struggle to find many people in Europe who could explain what these regulations are, and how they work, with any degree of technical understanding, simply because they are very new and very complicated,” he explained. The European Green Deal, approved in 2020, is the bloc’s signature policy to achieve net-zero greenhouse gas emissions by 2050. The regulations EDFI wants the European Commission to rethink are: • The 2020 EU Taxonomy Regulation, requiring labeling of “environmentally sustainable” activities in a “green asset ratio,” or GAR. It says investors’ projects outside Europe will be excluded — “giving the superficial impression that their portfolios are not sustainable.” For example, the Netherlands development investment bank, FMO, “invested almost €1.1 billion ($1.18 billion) in green projects in 2023, financing emissions reductions of over 2 million tons of CO2 equivalent, yet its GAR is technically 0%.” • The 2019 Sustainable Finance Disclosure Regulation, to measure “principal adverse impacts (PAIs) on biodiversity, water and waste, plus “social and employee matters” — which create “the risk that it will not be possible to satisfy the associated disclosures due to a lack of data, or not meeting these requirements.” • The Corporate Sustainability Reporting Directive, or CSRD, brought in from 2024 with “mandatory auditing” — which will “significantly increase expectations as regards the quality and reliability of the information disclosed.” The EDFI Association is urging the European Commission to “broaden” its regulations to recognize existing standards used by the World Bank’s private sector arm, the International Finance Corporation, and by multilateral development banks. It should also incorporate “national green taxonomies emerging in countries like Rwanda, Kenya, and South Africa, which are better tailored to the climate change effects and challenges they face.” Brenton added: “The European framework is great — when applied to Europe. It wasn't written to be applicable to Morocco, or South Africa, and when you do apply it to Morocco or South Africa you end up with the wrong conclusions.” He said DFIs are not seeking an exemption from the regulations, but for them “to be adapted to incorporate the good standards we are already using, that are recognized as robust and effective.” Devex has asked the European Commission to respond to the criticisms.