Sustainable finance: Commission welcomes deal on an EU-wide classification system for sustainable investments (Taxonomy)

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This article is brought to you in association with the European Commission.

The European Commission has welcomed today’s political agreement between the European Parliament and the Council on the creation of the world’s first-ever “green list” – a classification system for sustainable economic activities, or taxonomy.

This will create a common language that investors can use everywhere when investing in projects and economic activities that have a substantial positive impact on the climate and the environment. It will help scale up private and public investments to finance the transition to a climate-neutral and green economy, redirecting capital to economic activities and projects that are truly sustainable. This political agreement underlines the EU’s commitment to implementing the Paris Agreement and  reach climate-neutrality by 2050.

Commission Executive Vice-President Valdis Dombrovskis for an Economy that Works for People,said: “This piece of legislation will be a game-changer in terms of tackling climate change, because it will enable billions in green investments to flow. Thanks to this green list, or taxonomy, investors and industry will for the first time have a definition of what is ‘green’, which will give a real boost to sustainable investments. That will be crucial for the European Green Deal to become a reality. My thanks to the European Parliament, Member States, the Finnish Presidency and to the rapporteurs for their steadfast negotiations, which have led to this compromise.”

Today’s political agreement is part of the Commission’s Action Plan on Financing Sustainable Growth and is an integral part of the Capital Markets Union’s efforts to connect finance with the needs of the real economy. It will allow investors to clearly know whether an investment is truly green or not. This is extremely important in order to activate private capital for the green transition.

Background

Up until now, there has been no common classification system at EU or global level that provides a definition of “environmentally sustainable” economic activities. The aim of this green list is to:

• Reduce fragmentation resulting from market-based initiatives and national practices
• Reduce “greenwashing”, i.e. the practice of marketing financial products as “green” or “sustainable”, when in fact they do not meet basic environmental standards.

Today’s political agreement set out a general framework for what can be classified as an “environmentally sustainable economic activity”. Notably, it sets out the following:

Six environmental objectives

1)   Climate Change Mitigation

2)   Climate Change Adaptation

3)   Sustainable Use and Protection of Water and Marine Resources

4)   Transition to a Circular Economy

5)   Pollution Prevention and Control

6)   Protection and Restoration of Biodiversity and Ecosystems

Four requirements that economic activities need to comply with in order to qualify

1)   They provide a substantial contribution to at least one of the six environmental objectives above;

2)   “No significant harm” to any of the other environmental objectives;

3)   Compliancewith robust and science-based technical screening criteria; and,

4)   Compliance with minimum social and governance safeguards

Today’s agreement sets out a general framework for green investment. A list of sustainable economic activities will be assessed based on the report from Technical Expert Group on Sustainable Finance and will be developed through delegated acts.