Sustainable Finance Series n.2/3
In this second article of our series, we focus on the European Commission’s Action Plan on Sustainable Finance and the EU-wide taxonomy (Classification system) on green investments. The EC’s efforts to set up and regulate a green finance taxonomy aims to create clarity on what is considered sustainable and which activities can be labelled as such. CSR Europe follows these developments closely.
An EU wide taxonomy on green and sustainable investments will guide companies and investors by creating a level playing field for so-called “green” financial products. A well-designed taxonomy will contribute to establishing a common language for Sustainable Finance and address the current communication gap between investors and companies. It will provide greater clarity to the markets on how to make an impactful investment in a sustainable future for the planet and our businesses.
Financial services companies have a crucial role to play here in driving and increasing long-term finance for sustainability. At CSR Europe, we uphold a vision of ‘Total Impact Disclosure’ that enhances social, environmental/climate and tax disclosure building a fact-based and quality dialogue between stakeholders, including investors.
The last IPCC report stressed the urgency to tackle climate-related change. From a financial perspective, approximately $7 trillion of annual investment in energy, transport, buildings and water infrastructure will be needed over the next 15 years to limit the warming of the planet. How is the Action Plan on Sustainable Finance addressing this issue?
ROLE OF THE TAXONOMY
To move capital towards green and low-carbon investments, the European Commission will provide a harmonized green classification system. Such standardization is currently missing at the EU level. The taxonomy will define which and to what degree economic activities can be considered environmentally sustainable. This should support both institutional and retail investors willing to invest in sustainable activities. Besides being a compass for investors, the taxonomy is expected to bring a significant behavioural change in the strategic decisions of asset managers. Financial actors will tend to adjust their holdings in order to move them within the borders of the certification and thus intercept the new flow of capitals.
WHAT CAN YOU EXPECT FROM CSR EUROPE?
The CSR Europe EU team are following closely developments and will provide EU insights and webinars to better understand the various output the European Commission plan to publish in June/July 2019. Investor engagement and corporate climate-related reporting are central topics for our Markets community of practice. Save the date for our upcoming events:
- June 4, 2019: Valuing Corporate Sustainability Performance Conference
- June 2019: EU issue insight on Sustainable Finance & Reporting
- October 24, 2019: Workshop on Corporate Climate Reporting
CONTENT OF THE TAXONOMY
The taxonomy will most likely be adopted by the end of 2019. Although the EC is still working on finalizing its content, some elements have already been communicated. To qualify as green, investments will need to fulfil all of the following requirements:
- Contribute substantively to at least one of the six EU environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use of water and marine resources
- Circular economy
- Pollution prevention
- Healthy ecosystem
- Not significantly harm any of the above environmental objectives;
- Be carried out in compliance with a number of minimum social and governance safeguards;
- Comply with specific technical screening criteria that will be specified by the EC for each economic activity.
Once developed, the taxonomy will be used by national and EU regulators to shape the requirements regarding financial products traded as “green”. Actors of financial markets will use the taxonomy to disclose how the environmental sustainability of investment was defined. The new rules will be operative after six months from adoption, to allow Member States to prepare for the changes.
Discover previous articles of the series: