Financial markets play an immensely important role in relation to the climate crisis. Currently, many of the often purely return-oriented investment decisions contribute to the rapid progress of climate change - but there is another way. The European Commission wants to turn the tables and redirect money flows to fund businesses that make the planet a better place. Social responsibility and ecological management are to become a competitive advantage.
The new taxonomy is an important foundation in this highly complex plan, because standards and labels can be created based on this sustainability definition to identify sustainable investments, for example the Climate Bonds Standard or the European Green Bond Standard currently under development. The resulting uniform, comparable and transparent data will give investors unprecedented insight into whether an investment is truly sustainable or not. As you can see: The taxonomy is very important to activate capital for the green transition of the economy.
Valdis Dombrovskis, European Executive Vice President for "An Economy Serving People", agrees:"This law will mark a turning point in the fight against climate change, as it will channel billions into green investments. Thanks to this "Green List" or taxonomy, investors and industry will have a definition of "green" for the first time. This will give a real boost to sustainable investment - which is crucial to making the European Green Deal a reality."
Background: European Green Deal
The European Green Deal was presented by the European Commission on December 11, 2019. The new growth strategy aims to make Europe the first climate-neutral continent by 2050.
The Green Deal Investment Plan, presented on January 14, 2020, aims to mobilize at least €1 trillion in sustainable investments over the next decade for this purpose. This money is intended to enable the public and private investments needed for the transition to a carbon-neutral, green, competitive and inclusive economy.
Now back to the taxonomy and the question of exactly how "environmentally sustainable economic activities" should now be defined.
"Ecologically sustainable economic activities" - What exactly does that mean?
The taxonomy establishes a general framework for what an "ecologically sustainable economic activity" is. It refers to six ecological goals:
- Climate change mitigation
- Adaptation to climate change
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection or restoration of biodiversity and ecosystems.
The taxonomy further specifies four requirements that economic activities must meet to qualify as environmentally sustainable:
1) Make a significant contribution to at least one of the six environmental goals listed above
2) "No significant harm" to any of the other environmental goals
3) Conformance with sound and scientifically based engineering criteria
4) Compliance with minimum social and governance guarantees
You can access the European Commission's press release here. Background on the European Green Finance plans can be found here (English).
The next steps
In September 2020, the Commission will present a renewed Sustainable Finance Strategy. You can download the fact sheet: "Financing sustainable growth" here.