EU Sustainability Taxonomy regulation to challenge greenwashing in financial industry

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EU Sustainability Taxonomy regulation to challenge greenwashing in financial industry

Last month, the European Parliament officially announced the EU’s Sustainability Taxonomy Regulation. The main intention of the regulation is to provide a regional framework for identifying and classifying economic activities as environmentally sustainable. Implementing a structured framework will hopefully reduce the implications of ‘greenwashing’, which involves marketing financial services and products as environmentally sustainable without credible information to support their claims and increase the efficiency of direct investment into sustainable projects.

The regulation incorporates six key environmental objectives that form the basis of the sustainability taxonomy. This includes: 

  • Climate Change mitigation
  • Climate change adaptation
  • The sustainable consumption and protection of water and marine resources
  • A shift towards a circular economy with an emphasis on waste reduction and an increase in the use of secondary raw materials
  • Improvements to pollution prevention and control
  • Enhanced protection of biodiversity and ecosystems

The regulation will enforce the European Commission to implement a list of screening criteria for each of the mentioned environmental objectives. It is anticipated that the plans for climate change mitigation and adaptation will be created by the end of this year, with a plan for a full application by the end of 2021. The other environmental objectives will be applied and ready by the end of 2022.

Businesses that are allocated within the details of the Non-Financial Reporting Directive i.e. companies with an excess of 500 employees, will need to include Taxonomy information as part of their non-financial statements. The first company reports and investor disclosures under the new EU taxonomy plans are expected to start in early 2022.

At this point, the UK will no longer be part of the European Union. At present, it is unclear whether the UK will implement the rulings into domestic law. John Glen, the economic secretary to the Treasury and City Minister said that whilst he acknowledges the need to avoid greenwashing and the importance of supporting global consistency, he is cautious to comment on to what level in which the UK will align with EU plans.

The interest to invest in sustainability is continuing to expand across all areas of financial systems. Enabling private investors to have more clarity and the capability to compare the environmental sustainability aspects of businesses and investment is a critical step to support this development. There are still some discussions to be had on defining the most effective method of reporting on sustainability efforts but the EU Taxonomy could improve this and create some much needed definition.

Over the last few years, Europe has raised its focus on sustainability within policy development, particularly within the financial sector. Back in 2018, the European Commission released its plan on financing for sustainable development. The EC has emphasised the need for sufficient and clear information on sustainability in order to provide capital towards key sustainable investments. One of the initial steps listed is creating a regional classification system, a taxonomy for sustainable activities in order to offer investors with clear and transparent details on environmental sustainability. Analysts believe the Taxonomy Regulation is a vital piece of the wider action plan in Europe.

 

The key objectives of the Taxonomy Regulation

Last year, over 200 experts representing the Technical Expert Group on Sustainable Finance (TEG) released a report on applying the principles of the Taxonomy and information on the criteria required to determine how all activities contribute to the mitigation or adaptation of climate change. Earlier this year, the TEG published the final version of the report.

Most importantly, the Taxonomy Regulation will support the challenge of greenwashing. Creating a clear classification of green investments will equip investors with the information to make informed decisions. One of the key goals of the EC plan is that the taxonomy will provide a blueprint for other nations around the world.

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