Taxonomies of sustainable investment and existing decision support approaches of EIA, SEA and CBA – a silver bullet for sustainable development? A response to Dusík and Bond

ABSTRACT

In this response to Dusík and Bond, I reflect on what taxonomies of sustainable investment will need to be able to deliver in order to add value to our existing efforts towards making development more environmentally sustainable. What support taxonomies should provide for strategic environmental assessment (SEA) of policies, plans and programmes and environmental impact assessment (EIA) of projects, as well as for cost-benefit analysis (CBA) of policies, plans, programmes and projects is discussed. In this context, I focus on the consideration of climate change and biodiversity as important examples. Exploring a (typical) real-life road infrastructure planning case, I depict some of the existing challenges for SEA and EIA as well as CBA. I conclude that if the use of taxonomies leads to CBA which is not corrupted by powerful (industry) interests and which can result in realistic estimations of costs and benefits as well as to SEA and EIA applications whose results that are not traded-off with alleged economic advantages, they would indeed be highly beneficial.

Introduction

Money talks. This ‘simple’ realization is a key reason for why taxonomies of sustainable investments should – in principle at least – be a good idea. Why? Well, if an unsustainable development does not get funded, it does not get built and cannot cause damage. So, what does the term ‘taxonomy’ actually mean? It was first used to describe the ‘science of classifying organisms’ (Ehrlich et al, 1988) and with regards to sustainable investments, became also used to describe the process for ‘determining whether a given economic activity is environmentally sustainable’ (Dusík and Bond 2022). Following on from what is stated above, the ultimate purpose of taxonomies should be to provide funding only to those actions and developments that are sustainable without trade-offs being made between different sustainability dimensions. Taxonomies of sustainable investments can accompany other major international initiatives, such as the UN sustainable development goals (SDGs; see Fischer 2020) and the agreements on climate change and biodiversity (arising from, for example, the 2021 COP26 Glasgow Summit and the 2021 COP15 Convention on Biological Diversity). They can also accompany national, regional and local sustainability initiatives, such as biodiversity net gain (see e.g. Knight-Lenihan 2020).

The aim of this short paper is to reflect on what taxonomies of sustainable investments should deliver, taking an environmental impact assessment (EIA) and strategic environmental assessment (SEA) perspective. In this context, the role played by another important decision support tool for policies, plans, programmes and projects, namely cost-benefit analysis (CBA) is also reflected on. Considering the shortness of this contribution, there is no ambition to make this an exhaustive account. Instead, I will focus on some recurring key issues and challenges of decision support approaches, as identified by, for example, Fischer and Gonzalez (2021).

Taxonomies of sustainable investments – what’s new?

Is an intention to base decisions on ‘return for money’ with regards to a defined ambition (here sustainability) new? Not really. Importantly, it is reflected in the thinking behind the already mentioned CBA which has been with us for over 150 years (Dupuit 1844) – albeit, originally not with a focus on environmental or sustainability issues. More recently, though, CBA has come to be applied to policies and actions with the objective to improve the environment (OECD 2018). Also, and associated with environmental CBA, the importance of ‘taking nature into account’ (the title of a Club of Rome Report; see Van Dieren 1995) when measuring economic activity has been acknowledged by the discipline of environmental economics since the 1960s (Pearce 2002). There is also a younger related discipline called ecological economics, which aims at preserving ecosystems and which emphasises strong sustainability (Faber 2008). A new aspect, which taxonomies of sustainable investments provide us with is the ambition to device classification systems of developments and actions with an aim to only finance those that are sustainable. How to reach an agreement on what developments and action can be considered sustainable is a different matter, though, and is likely to raise some controversial debate, not dissimilar to the debates we see routinely in SEA and EIA processes. It is likely that decision processes on what should be considered sustainable will also need to be accompanied and informed by impact assessment approaches, such as SEA (as this will be a policy decision) in connection with other tools, such as life-cycle assessment (LCA).

EIA and SEA assumptions underlying Dusík and Bond’s elaboration – a critical reflection

Here, I will critically reflect on (some of) the assumptions underlying Dusík and Bond’s (2022) text, focusing on their assertions on EIA. Whilst the two authors also mention SEA, they do so in passing only and without any specific deliberations on the differences of EIA and SEA. What they are elaborating on is mainly associated with what the former (i.e. EIA) stands for (on the differences between SEA and EIA, see Partidário and Fischer 2004). I believe this is problematic, as taxonomies for sustainable investments are likely to – potentially at least – mainly influence decisions made above the project level, that is, at the levels of (investment) policies, plans and (to a lesser extent) programmes (as these mainly provide lists of future projects), where there are still real options available for making sustainable choices and where SEA is used. In practice, at the project level, choices are usually much reduced, as I will show further below, discussing a transport infrastructure project from Germany as a case which exemplifies typical EIA and SEA as well as CBA challenges. The suggestion that EIA ‘facilitates trade-offs for socio-economic gain’ (Dusík and Bond 2022) is taxing, as trade-offs are not usually considered through EIA. Rather, EIA routinely works within decision making contexts that allow for trade-offs to be made by decision makers outside an EIA process (and important decisions on whether or not to go ahead with a particular project would often be made before EIA even starts). Whilst it may well be that this is what the authors mean, it is important to underline the difference, as EIA is often blamed for failures that are outside its sphere of influence. Also, and following on from what I said above, trade-offs made for projects that involve the preparation of EIA usually reflect options of a (very) limited bandwidth of choices on the sustainability spectrum (from weak to strong), revolving around, for example, alternative sites or designs. In this context, decision makers mostly – and deliberately – assign EIA a weak role and equip it with very limited powers, allowing it to exert some moderate impact at best (and this is not dissimilar to what has been happening with other environmental and sustainability tools, instruments and approaches; an example are the Local Agenda 21s from the 1980s and 1990s, as described by Fischer 1999). Looking at transport planning as an example, an EIA for a new road bypass would usually only be allowed to consider different geographical locations, resulting in small differences of impacts different options potentially cause with regards to, for example, carbon emissions. Here, EIA is not normally allowed to assess options that have large differential impacts, for example, intermodal options, such as walking and cycling or rail. The latter are (or at least should), however, be considered in transport policies and plans, and it is here where a real difference can be made with regards to decisions that are sustainable (see Fischer 2006).

Furthermore, and sticking with the example of transport infrastructure planning, when aiming at sustainable investments, in developed economies, some projects should only very rarely be financed under a taxonomy of sustainable investments, for example, new major road projects, if the objective is to not do significant harm to any sustainability aspect. This is because major linear infrastructures play a key role in continuing biodiversity decline throughout the world (see e.g. Vitousek et al. 1997; Nayak et al. 2020). Importantly, in developed economies, they are also questionable with regards to regional economic benefits (see Fischer 2012) and are now one of the main causes for both, noise and air pollution (https://www.eea.europa.eu/themes/transport/intro). Therefore, only those projects should receive funding that are associated with major reduction, mitigation and compensation measures of potentially negative environmental impacts, including, for example, green bridges, silent asphalt and others. Compensation measures can also include decommissioning or reducing underused roads elsewhere (admittedly most likely a measure that many decision makers would find hard to swallow). Considering the current seriousness of biodiversity challenges, any transport planning decisions should therefore be guided by what is widely referred to as strong sustainability thinking. This is implied by Dusík and Bond (2022) when suggesting ‘where sustainable development is defined as protecting the bottom line, rather than simply facilitating trade-offs in the name of economic development, there are implications for the way that significance is interpreted within EIA (potentially raising the bar such that any losses become highly significant).’ If taxonomies can ultimately lead to projects that are able to reflect such ambitions, they would indeed represent a great step forward. However, they would certainly not simply depict lists with e.g. types of projects that are/are not sustainable. Considering complexities, rather, they would need to define conditions as to when and under what circumstances certain types of developments can be considered sustainable. In this context, it is important that associated investment decisions will frequently be of a strategic nature, rather than project specific, meaning impacts would need to be assessed through SEA which should then need to be provided with some real powers to reject decisions that violate sustainability ambitions.

Old wine in new bottles? Learning from existing approaches

So, what about experiences with other decision support approaches, such as CBA? A key and consistent challenge for CBA is that it tends to systematically underestimate costs whilst overestimating benefits (Flyvbjerg et al. 2010), even within traditional economic applications, that is, in situations where no particular attention is given to environmental issues. In addition, unless CBA results are in line with the interests of those with power and influence (NB: there are ways for CBA, which functions as a calculation, to generate results that reflect their interests), its influence overall can be seen as moderate only (similar to EIA and SEA; see Fischer and Retief 2021).

To provide a typical example here, and one which is representative of practices in many parts of the world, I refer to a case I previously mentioned in Impact Assessment and Project Appraisal, namely a 100 km planned new motorway in northern Germany, the A39 between Lüneburg and Wolfsburg (Fischer 2019). CBA results from the Federal Transport Infrastructure Plan (FTIP) suggest that this project’s benefit-cost ratio is very small, just above the level where funding is considered justifiable, according to Federal rules (see Rehhausen et al. 2021). However, there are indications that construction costs allocated to this project in CBA are unrealistically low (in line with observations on similar projects in many other countries; see Flyvbjerg et al. 2003). This also includes costs for necessary reduction, mitigation and compensation measures, not just for negative environmental, but also socio-economic impacts. In this context, public consultation for a 20 km section of the project resulted in over 2,000 objections by members of the public. Bewilderingly, every single one of these was dismissed by the responsible road authority. However, experiences with other road projects show that at least a few of these concerns will eventually need to be addressed, thus driving up construction costs further and reducing the associated benefit-cost ratio. Regardless, due to considerable political pressure, exerted by, for example, various small towns along the route of this planned new motorway (which was first mentioned in a national transport plan of the 1930s), planning permission for some construction stages has now been granted. However, from an environmental perspective, this project is associated with two cardinal concerns; (1) it would cut through the largest remaining major area in Germany not yet severed by any motorway (a triangle of about 20,000 km2 between Hamburg, Berlin and Hannover); and (2) it is not in line with Federal Climate mitigation targets (this, however, has neither been assessed in SEA, nor EIA).¹

Importantly, a non-statutory strategic study, commissioned by a state ministry, on how to improve infrastructure in the Hamburg-Berlin-Hannover triangle, produced over 25 years ago (Ministerium für Wohnungswesen, Städtebau und Verkehr 1995) had rejected the construction of a new motorway for economic, social and environmental reasons. However, results were ignored by the Federal Ministry for Transport and none of the subsequent studies and assessments refer to the study. In the planning of this mega-project, SEA was conducted solely at the programme level (following Fischer 2006) for the FTPI, where only potential impacts of individual suggested projects were established, without a possibility to influence the choice of projects though, for example, the consideration of inter-modal alternatives. Furthermore, EIA focused exclusively on assessing different route options in a narrow corridor. All in all, this is a rather typical example for how political (and industry) pressures can easily influence and override results of what is meant to be independent and unbiased assessments and where SEA and EIA are provided with a role on the sidelines only.

If taxonomies turned out to be able to address recurring poor practices such as the one depicted above, in particular with regards to not assessing the full range of available alternatives within tiered decision making in support of climate and biodiversity policy, they would be very valuable. In the context of an EU taxonomy, it will be interesting to see how it would affect the choice of projects included in the Trans-European Transport Network (TEN-T) policy. Whilst associated regulation (EC, 2013) mentions the need for member states to conduct SEA and EIA for TEN-T projects (and EIA is supposed to consider climate change mitigation), no SEA was conducted for the regulation itself. It is a sensible assumption that the use of an EU taxonomy would lead to addressing this shortcoming.

The sticking point – agreeing on a classification of sustainable developments and action

Following on from the discussion above, the key challenge for establishing the cornerstones of any taxonomy of sustainable investment will be to agree on what can be considered sustainable finance, that is, what developments and actions are worthy of financial support. An example for this challenge is the current debate surrounding the recent conditional inclusion of natural gas and nuclear energy as sustainable in the European Green Taxonomy. In this context, the climate policy spokesperson for the Green Party in the European Parliament stated that ‘With this proposal [EC President] Ursula von der Leyen is destroying the credibility of the European sustainability label for financial investments. Including nuclear and gas in the taxonomy is like labelling eggs from battery farming as organic’ (S+P Global 2022). Importantly, any taxonomy will need to accept the complexities of the task and will need to apply an approach where conditions are formulated for when certain types of development and action can be considered sustainable. This is likely to include extensive lists of potential mitigation and compensation measures that will need to be taken into account in a life-cycle assessment of a particular type of development/action.

Conclusion

In conclusion, taxonomies of sustainable investments hold some promise and SEA and EIA could be suitable instruments for ensuring effective implementation (and SEA could support the drafting of taxonomies, too). However, the use of taxonomies will only lead to real change if societies learn to start embracing strong sustainability thinking and begin to open up to real change. As experiences with SEA, EIA and CBA have shown, in the absence of a willingness of decision makers to support the changes that sustainable development requires, taxonomies of sustainable investments will find it hard to make an impact. I believe that what is currently particularly missing is not the availability of suitable support tools and approaches, but rather the political will to act (Fischer 2019). Whether or not taxonomies will lead to avoiding unsustainable and therefore undesirable development will be the ultimate litmus test for their usefulness. Expectations are certainly high!

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. In this context, a legal opinion by Baumann Rechtsanwälte (2021) concluded that the FTPI was unconstitutional, as it does not include an assessment of cumulative environmental and climate change effects and in this context, legal challenges have indeed been launched on a few road projects. Similarly framed legal cases with regards to violations of climate change policy are found elsewhere too, for example, in the UK for the Road Investment Strategy 2 (RIS2), published in 2020 and for which no environmental assessment was conducted (see https://www.crowdjustice.com/case/stop-largest-ever-roads-programme/)