Sustainable finance: 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 today 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.

Private sector participation is absolutely crucial in addressing the challenges posed by climate change. Hundreds of billions euros of investment are required to achieve the transition to a sustainable economy and it is clear the capital needed cannot come from public budgets alone. In order to help investors contribute to the transition, a first important step is to have a shared understanding of what “sustainable” means.

Mika Lintilä, minister of finance of Finland

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.

On this basis, the Commission would then be tasked to establish the actual classification by defining “technical screening criteria” for each relevant environmental objective. Legally, the criteria would take the form of delegated acts as regards the sector classification of economic activities. They would be supplemented by implementing acts defining quantitative and qualitative thresholds which must be met by the economic activity in order to be considered environmentally sustainable.

The Commission would be assisted by a technical expert group, the “Platform on sustainable finance”, which would be mandated to provide advice for developing the technical screening criteria and analyse their impact in terms of potential costs and benefits of their application. In addition, the Commission will be advised by an expert group consisting of experts from member states on the appropriateness of the technical screening criteria.

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.