On 25 September 2019 the Council of the European Union announced that it has agreed its position on a proposal to create an EU-wide classification system, or “taxonomy”, in order to establish a common framework to facilitate sustainable investment as part of the EU strategy on financing sustainable growth and the transition to low-carbon, resource-efficient economy. This represents a significant step towards a legally-binding standard for sustainable finance.
At present, there is no common classification system at EU or global level which defines what is an environmentally sustainable economic activity. The proposed regulation establishes an EU-wide classification scheme that is intended to (i) reduce fragmentation resulting from market-based initiatives and national practices; and (ii) reduce “greenwashing”, i.e the practice of marketing financial products as “green” or “sustainable”, when in fact they do not meet basic environmental standards.
According to the proposed EU “taxonomy”, in order to qualify as being environmentally sustainable, an economic activity would have to fulfil the following requirements: (i) must contribute substantially to at least one of the six environmental objectives identified in the Council’s proposal (namely, climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems); (ii) must not cause significant harm to any of those environmental objectives; (iii) must comply with minimum social and governance safeguards; and (iv) must comply with specific technical screening criteria.
By establishing common criteria on environmentally sustainable investments, the proposed regulation is intended to provide businesses and investors with a common language to identify to what degree economic activities can be considered environmentally sustainable and make it easier for businesses to attract capital for sustainable investment from across the EU.
Next steps
On 28 March 2019, the European Parliament adopted a legislative resolution with its position at first reading concerning the proposed “taxonomy” regulation. Negotiations between the Council and the Parliament are, therefore, ready to start.
According to the Council position, the “taxonomy” should be established by the end of 2021, in order to ensure its full application by end of 2022.
