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    EU Reaches Political Agreement on Sustainable Investment Taxonomy

    December 18, 2019

    EU ambassadors endorsed a political agreement reached between Finland's presidency of the Council and the European Parliament on 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. At present, there is no common classification system at EU or global levels to define an environmentally sustainable economic activity. The proposed regulation is meant to reduce fragmentation resulting from market-based initiatives and national practices as well as reduce the practice of marketing financial products as green or sustainable, when they do not meet basic environmental standards.

    The future framework on sustainability will be based on six EU environmental objectives. These are climate change mitigation,climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. The taxonomy for climate change mitigation and climate change adaptation should be established by the end of 2020, to ensure its full application by end of 2021. For the four other objectives, the taxonomy should be established by the end of 2021, for an application by the end of 2022. The taxonomy will be instrumental for EU to become climate-neutral by 2050 and achieve the Paris agreement's 2030 targets. 

    To qualify as environmentally sustainable, economic activities will have to fulfill the following requirements:

    • Contribute substantively to at least one of the six environmental objectives
    • Not significantly harm any of the environmental objectives
    • Be carried out in compliance with minimum social safeguards
    • Comply with specific technical screening criteria

    The taxonomy will include two sub-categories of "enabling" and "transitional" activities. There will be an obligation to disclose, for each financial product, the proportion invested in the enabling and transitional activities. On this basis, EC will be tasked to establish the actual classification by defining technical screening criteria, in the form of delegated acts, for each relevant environmental objective and sector, respectively. EC will be assisted by a technical expert group, the "platform on sustainable finance," which will be mandated to provide advice for developing and revising the technical screening criteria as well as reviewing their usability. In addition, EC will be advised by an expert group consisting of experts from member states on the appropriateness of the technical screening criteria and the approach EC to be taken regarding these criteria. The new rules will be formally adopted by the Council and the Parliament following legal and linguistic revision of the text, pursuant to the "early second reading agreement" procedure.

     

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    Keywords: Europe, EU, Banking, Insurance, Securities, Sustainable Finance, Taxonomy, ESG, Climate Change Risk, European Parliament, European Council

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