ESG principles: the limits to green benchmarking

Taxonomy and efficiency assessments provide financial intermediaries (FIs) with guidance to grant funds according to the Environmental, Social and Governance principles. The EBRD provides a classification of industries according to a priori potential risk (low, medium or high). Using a panel of 28 industries in Luxembourg (2008-2019) and National Account data (NA), we challenge this taxonomy. We compute Data Envelopment Analysis (DEA) efficiency scores indicating if an industry could increase output while simultaneously lowering the emission of greenhouse gases. Our results show that EBRD low risk industries are the most efficient ones. Surprisingly, high-risk industries are more efficient than medium-risk ones, suggesting a potential unintended outcome of the EBRD taxonomy—limiting credit to industries classified as high risk that are in fact more efficient than industries classified as medium risk.