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Taxonomy for green investments: EU shows leadership on sustainable finance

Sustainable finance

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Brussels, 18 December 2019 – Finance Watch applauds EU Member States for approving today a taxonomy for sustainable investments. A positive and balanced agreement was reached in negotiations between the EU institutions, showing the EU’s commitment to work towards a financial system that serves people and the planet.

Finance Watch specifically welcomes the broad scope of the regulation, the clarification of eligible activities, the provisions on mandatory data disclosure as well as the introduction of a review clause to assess the effectiveness of the taxonomy in reorienting capital flows towards sustainable activities.

Benoît Lallemand, Secretary General of Finance Watch, said:

A few days after the disappointing results of the COP25, Europe shows clear leadership on developing a concrete plan for how finance can contribute to the ecological transition. This is an important signal that member states are increasingly listening to both science and strikers.”

Thierry Philipponnat, Head of Research and Advocacy of Finance Watch, said:

“A science-based taxonomy aligned with EU environmental objectives will only deliver its potential once the data required for its applicability is available. The taxonomy regulation as agreed today is the first and necessary step towards the creation of an EU financial legislative framework that aims to reorient capital flows towards a more sustainable economy.

Considering that the transition to a sustainable economy calls for an ambitious and science-based taxonomy, we particularly welcome the following aspects of the deal:

  • Broad scope: According to the agreement, all financial market participants will have to comply to a certain extent with the taxonomy. Those that market their products as environmentally sustainable will have to disclose how and to what extent the taxonomy has been used and the proportion of the investment that is eligible according to the taxonomy. All other financial market participants will have to explicitly state that their investments “do not contribute to any environmental objective”. We welcome this extension of the scope that will bring more transparency for investors and will allow for a more level playing field between different financial market participants.
  • Separate disclosure of eligible activities: Following a recommendation of the Commission’s Technical Expert Group (TEG), the Council proposed to integrate three categories of green economic activities (sustainable, transition and enabling) in the scope of the taxonomy. Recognizing the risk of creating a loophole that could undermine the very objective of the Regulation, the negotiators rightly concluded that these three categories of green activities needed to be disclosed separately, ensuring that the contribution of each activity is disclosed in an unambiguous way.
  • Disclosure obligations for companies: Negotiators rightly introduced an obligation for large companies to disclose their share of turnover, investments and expenditures which are taxonomy compliant. This is a precondition for enabling the application of the taxonomy.
  • Review clause on ex-post assessment of the effectiveness of the taxonomy: Finally, Finance Watch welcomes the provision requesting the Commission to conduct an ex-post assessment of the effectiveness of the taxonomy in reorienting capital flows towards sustainable investment. This is of utmost importance for ensuring that the taxonomy achieves the impacts for which it was conceived.

ENDS

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NOTES FOR EDITORS

What is the ‘Green taxonomy’ about?

  • As a cornerstone of its “Action Plan on financing sustainable growth”, the Commission proposed a regulation establishing a framework to create, over time, a unified classification system of what can be considered environmentally sustainable economic activities in the most significant sectors (e.g. agriculture, transport, manufacturing, energy).
  • This ‘Green taxonomy’ will enable investors to distinguish between activities that contribute significantly to a sustainable economy and those that do not, and to invest accordingly. Ensuring harmonization will therefore reduce transaction costs, send a signalling effect to market participants and reduce risks of greenwashing.
  • The taxonomy could also become the bedrock of current and future EU policies supporting sustainable finance, such as standards and labels for green financial products (e.g. the EU Green Bond Standard and EU Ecolabel for financial products that are currently under discussion).

How does it work?

  • Six environmental objectives are covered by the taxonomy: climate mitigation, climate adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention control, and protection and restoration of healthy ecosystems.
  • For an economic activity to qualify as environmentally sustainable, it will have to:
  1. Contribute substantially to at least one of the six environmental objectives;
  2. Do no significant harm (DNSH) to any other environmental objectives;
  3. Comply with minimal social safeguards;
  4. Comply with technical screening criteria for substantial contribution and for DNSH. These criteria will be laid down in delegated acts, following recommendations from relevant stakeholders (i.e. expert groups – the TEG at first, followed by the ‘Platform on sustainable finance’ – and public consultation).

Legislative timeline

A proposal for an EU taxonomy for sustainable activities, officially called Regulation on the establishment of a framework to facilitate sustainable investment, was presented by the European Commission in May 2018.

On 18 June 2019, the Technical Expert Group (TEG) on sustainable finance, of which Finance Watch is a member, published its Technical report on EU taxonomy. The report set out the basis for a future EU taxonomy in legislation.

On 16 December 2019 co-legislators reached the compromise on the taxonomy for green economic activities. The deal was official endorsed by the Committee of the Permanent Representatives (COREPER) on 18 December 2019.

The agreement reached still has to be officially endorsed by the European Parliament, expected to take place early 2020.

The European Commission will publish the first two delegated acts for mitigation and adaptation activities by the end of 2020, which are expected to apply by the end of 2021.

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