The European Commission is creating the regulatory conditions for the financial markets to mobilise funding and enable their Green Deal initiative. There are two important recent developments in the regulatory framework aiming at reaching this goal.
EU Taxonomy framework
The European Commission has defined a framework with criteria for qualifying whether one or more economic activities can be classified as environmentally sustainable for investment purposes. The taxonomy looks to support activities that contribute to one of the six overarching objectives:
- 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 ecosystems.
The aim of the framework is to determine which activities can be regarded as providing substantial benefits to one of the six environmental objectives, without harming significantly any of the other objectives or breaching human and labour rights. The framework has passed into legislation on June 18, 2020. Additional technical screening criteria to complement the framework are in development and should come into force in 2022.
A full overview of the economic activities covered can be found here in articles 10 to 15.
Sustainable Finance Disclosure Regulation
The Sustainable Finance Disclosure Regulation (SFDR) comes into force in 2022. The regulation will be accompanied by new EU sustainability reporting standards for large companies. The standards aim at simplifying corporate reporting and making sustainability information widely available. Companies will have to use this standard to report on how their activities contribute to climate change and other sustainability issues, as well as how these issues impact their operational results. It is predicted to increase the number of companies that need to report on their sustainability performance from 11.000 to 50.000. The resulting provided information is supposed to help investors understand the environmental performance and risks associated with one or another asset, and enable the allocation of their green investment resources accordingly.
The European Commission moves forward with more rigid regulatory conditions for green investments. They do so by clarifying what can be considered a green investment, and by creating mechanisms to enhance visibility of companies’ environmental risk and performance. These regulations will drive the new wave of future investments to achieve CO2 reduction across industries in Europe.