Sustainable finance: European Council agrees position on a unified EU classification system

The EU is taking steps to implement its strategy on financing sustainable growth and the transition to a low-carbon, resource-efficient economy.

EU ambassadors yesterday (25 September) greenlighted the Council’s position on a proposal to create an EU-wide classification system, or “taxonomy”, which will provide businesses and investors with a common language to identify what economic activities can be considered environmentally sustainable.

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.

Create a definition

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 is meant to address two challenges:

-reduce fragmentation resulting from market-based initiatives and national practices;

-reduce “greenwashing”, i.e. the practice of marketing financial products as “green” or “sustainable”, when in fact they do not meet basic environmental standards.

As set out in the Council position, the proposal identifies and defines six EU environmental objectives:

1) climate change mitigation;

2) climate change adaptation;

3) sustainable use and protection of water and marine resources;

4) transition to a circular economy, including waste prevention and recycling;

5) pollution prevention and control; and

6) protection and restoration of biodiversity and ecosystems.

In order to qualify as environmentally sustainable, economic activities would have to fulfil the following requirements:

-contribute substantively to at least one of the six environmental objectives listed above.

-not significantly harm any of the environmental objectives;

-be carried out in compliance with minimum social and governance safeguards;

-comply with specific technical screening criteria.