European Parliament negotiators have agreed in principle with the EU Council on a taxonomy that will provide investors with clarity on whether an economic activity is environmentally sustainable, in what has been called a “gamechanger” in the fight against climate change.
Following the implementation of the legislation, all financial products claiming to be sustainable will have to prove so.
The proposal has been criticised by Green MEPs for not including social and governance factors in the taxonomy.
Bas Eickhout, Economic Affairs Committee rapporteur, said: “The compromise also includes a clear mandate for the [European] Commission to start working on defining environmentally harmful activities at a later stage. Phasing out those activities and investments is indeed as important to achieve climate-neutrality as supporting decarbonised activities.”
According to the EU taxonomy, certain environmental objectives should be considered when evaluating how sustainable an investment is.
These include: climate change mitigation, sustainable use and protection of water, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.
The legislation states that an economic activity should contribute to one or more of the agreed environmental objectives.
Environmental sustainability should also be measured using a unified classification system as national labels based on different criteria “make it difficult” for investors to compare green investments. The EU taxonomy is also aimed at protecting investors from the risks of greenwashing.
Sirpa Pietikainen, lead negotiator for the European Parliament’s Environment Committee, said: “The taxonomy for sustainable investment is probably the most important development for finance since accounting. It will be a gamechanger in the fight against climate change.”
She added: “Greening the financial sector is a first step to make investments flow in the right direction, so it serves the transition to a carbon neutral economy.”
Only solid fossil fuels such as coal or lignite are categorically blacklisted in the taxonomy. Gas and nuclear energy production are not explicitly excluded as they can potentially be labelled as an enabling or transitional activity.
The director general of the European Fund and Asset Management Association, Tanguy van de Werve, supported the legislation as a means to fight climate change and meet the Paris agreement goals.
“A well-designed EU taxonomy is needed to bring clarity on what constitutes sustainable investments, enhance comparability for investors and prevent greenwashing,” he said.
“Robust and publicly available ESG disclosures on investee companies are a prerequisite to make EU taxonomy work in practice, especially in view of the scope of the disclosure requirements being enlarged to include all financial products.”
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