Recent regulatory developments and EU Member States governmental decisions show that we need more investments in sustainable development and more strategic actions in transforming the economic activities to environmentally-friendly businesses. In order to make progress in this we need to understand what the sustainable finance actually is and how it affects the business world.
Athina Moustaki, Head of Environmental, Social, Governance, Risk and Compliance Services (ESGRC), explains what the EU taxonomy is all about and how it aims to reduce greenwashing and drive investments in achieving the EU 2050 Climate Goals.
By passing the Green Deal in 2019, the European Union (EU) set the course for more sustainable investments, for example in areas like renewable energy, biodiversity or circular economy. The goal is to reach a climate-neutral economy in the EU by 2050, with a reduction of 55% already implemented in 2030. To achieve these climate goals, the Green Deal includes an investment plan of 1 trillion euros over the next 10 years. Despite this huge investment, the EU depends also on the support of the private sector to achieve the Paris climate agreement.
The EU is driving positive change to establish a framework for what sustainable finance truly means. Greenwashing is a common practice where products, investments or corporate bonds are branded as sustainable, but without the credentials to back it up. This isn’t necessarily deceptive. The trouble is that without a standard set of definitions and rules for what these terms mean, it's difficult for companies and investors to define what is and isn't 'green'.
The Regulation (EU) 2020/852 on EU Sustainable Finance Taxonomy came into force last summer, with criteria and disclosure requirements to demonstrate sustainability and give investors more confidence. This new taxonomy is part of a wave of activity from industry bodies and regulators to build trust in sustainable finance, and give investors confidence that sustainable finance is more than just a buzzword. The EU Taxonomy regulation promotes equal competition and legal certainty for all companies operating within the EU and aiming to the:
- Reorientation of capital flows with a focus on sustainable investments
- Establishing sustainability as a component of risk management
- Promoting/encouraging long-term investment and economic activity
Let’s take a look at the EU taxonomy, and review key requirements for firms.