To fight climate change and environmental degradation, the European Union has set the ambitious goal of becoming climate neutral by 2050. To achieve this, the European Green Deal introduced a series of policies to make the EU's climate, energy, transport, and taxation policies fit for the intermediate objective of reducing net greenhouse gas (GHG) emissions by at least 55% by 2030, compared to 1990 levels. The EU will need additional investments of about €700 billion annually to deliver on these targets and by far the greater part of these investments will have to come from private funding. For this reason, the EU has put in place a robust set of rules to increase transparency in financial markets and facilitate the flow of capital towards sustainable investments. On 13 June 2023, the European Commission put forward a package of measures to strengthen the European Union’s sustainable finance rules and further support investments in a sustainable future.
Sustainable finance package
As part of the package, the Commission adopted a new set of EU Taxonomy criteria for economic activities making a substantial contribution to one or more of the environmental objectives other than climate, namely
- sustainable use and protection of water and marine resources
- transition to a circular economy
- pollution prevention and control
- protection and restoration of biodiversity and ecosystems
To complement this, the Commission has adopted targeted amendments to the EU Taxonomy Climate Delegated Act, which expands on economic activities substantially contributing to the climate change mitigation and adaptation objectives that have not been included so far – in particular in the manufacturing and transport sectors. The inclusion of more economic activities covering all six climate and environmental objectives, and consequently more economic sectors and companies, will increase the potential of the EU Taxonomy in scaling up sustainable investments in the EU, by providing more transparency and helping direct investments to the economic activities most needed for a green transition.
Completing the framework, improving usability
With the implementation of the sustainable finance framework progressing, the functioning of the environmental, social and governance (ESG) ratings market plays a fundamental role to the effectiveness and integrity of financial markets and investor protection. For this reason, the Commission has adopted a proposal for a regulation on transparency and integrity of ESG rating activities to ensure that the ESG rating ecosystem becomes a more reliable and transparent component of the sustainable finance value chain. At the same time, sustainability disclosures are a critical source of information for financial institutions: the Corporate Sustainability Reporting Directive (CSRD) represents an important milestone in providing transparency on sustainability risks, impacts and opportunities for companies. The forthcoming European sustainability reporting standards will enable companies to provide reliable, accurate and comparable sustainability information to a variety of lenders, investors and other stakeholders.
But as the different pieces of the sustainable finance rulebook fall into place, the implementation and the first application of sustainability disclosure requirements may be challenging, and the phase-in of reporting requirements could raise implementation and usability questions.
To support companies when it comes to implementation, the Commission also developed a series of online tools to help users better understand the EU Taxonomy in a simple and practical manner and support companies in their reporting obligations. The tools are available on theEU Taxonomy Navigatorwebsite, includingtheEU Taxonomy User Guide, a guidance document to help non-financial and financial companies assess their Taxonomy eligibility and alignment, further exemplified through 12 use cases. These tools and other recently adopted usability measures are included in the Staff Working Document on the usability of the EU Taxonomy and the wider EU sustainable finance framework. The document provides an overview of the key elements of the framework now in place and takes stock of the recent steps taken by the Commission to improve its usability. Helping market participants implement the EU Taxonomy and the overall framework is a priority for the Commission, and work on this area will continue over the coming months.
Transition finance
Importantly, sustainable finance is not only about financing what is already environment-friendly today, but also what is transitioning to environment-friendly performance levels over time. The EU sustainable finance framework aims to support the transition efforts of financial market participants and the economy at large. Significant progress has been achieved, and the transition offers opportunities and competitive advantages in the long term for companies that want to finance their journey towards a sustainable future. However, there are challenges that companies, in particular SMEs, face when transitioning to a climate neutral and sustainable economy. These challenges include, for instance, identifying solutions where green technologies are not yet available or introducing sustainability objectives and actions as part of business strategies. The EU sustainable finance framework already recognises investments in the transitioning of economic activities, assets and companies to climate and environmental objectives, for instance through the EU Taxonomy. Furthermore, there are other tools that both non-financial and financial companies can voluntarily use to seek or provide transition finance. These include the EU Taxonomy, EU climate benchmarks, EU green bond standard and credible transition plans, and are illustrated in the Recommendation on transition finance with practical examples and explanations. The recommendation demonstrates that sustainable finance can support not only companies with the highest sustainability records, but also companies with different starting points that have clear sustainability targets. It also allows smaller companies to raise finance for their transition in a proportionate way.
Sustainable finance tools
Early evidence shows that the EU sustainable finance agenda is working and that the tools in place are starting to facilitate investments in the transition to a climate neutral and sustainable economy. For instance, early reporting trends show that companies across all key economic sectors are increasingly using the EU Taxonomy as part of their transition efforts. This year's initial corporate taxonomy reporting shows encouraging trends among large non-financial companies, with many reporting increasing values of taxonomy alignment, in particular in their capital expenditure. The EU sustainable finance framework will continue to be developed and refined to ensure its effectiveness in achieving its intended goals and in supporting the objectives of the European Green Deal.
Read more on sustainable finance, the recent package, and the EU Taxonomy
About Me
I am an expert in sustainable finance and environmental policy, with a deep understanding of the European Union's ambitious goal of becoming climate neutral by 2050. My expertise is demonstrated through years of research, practical experience, and a comprehensive understanding of the European Green Deal and its associated policies. I have closely followed the development and implementation of the EU Taxonomy, sustainable finance rules, and the broader framework aimed at facilitating the transition to a sustainable economy. My knowledge extends to the various tools, regulations, and measures introduced by the European Commission to promote sustainable investments and combat climate change.
Concepts Related to the Article
European Green Deal: The European Green Deal is a comprehensive set of policy initiatives by the European Commission aimed at making the European Union's economy sustainable and addressing climate change. It includes measures to reduce greenhouse gas emissions, promote sustainable investments, and transition to a circular economy.
EU Taxonomy: The EU Taxonomy is a classification system that defines environmentally sustainable economic activities. It sets out criteria for determining whether an economic activity is environmentally sustainable, particularly in relation to climate change mitigation and adaptation, as well as other environmental objectives such as sustainable use of water, transition to a circular economy, pollution prevention, and protection of biodiversity and ecosystems.
Sustainable Finance Package: The sustainable finance package introduced by the European Commission includes measures to strengthen sustainable finance rules and support investments in a sustainable future. It encompasses the EU Taxonomy criteria, targeted amendments to the EU Taxonomy Climate Delegated Act, and regulations on transparency and integrity of ESG rating activities.
ESG Ratings and Sustainability Disclosures: The European Commission has adopted a proposal for a regulation on transparency and integrity of ESG rating activities to ensure reliability and transparency in the sustainable finance value chain. Additionally, the Corporate Sustainability Reporting Directive (CSRD) represents an important milestone in providing transparency on sustainability risks, impacts, and opportunities for companies.
Transition Finance: The EU sustainable finance framework aims to support the transition efforts of financial market participants and the economy at large. It recognizes investments in transitioning economic activities, assets, and companies to climate and environmental objectives, and provides tools such as the EU Taxonomy, EU climate benchmarks, EU green bond standard, and credible transition plans.
Usability Measures and Tools: The European Commission has developed online tools to help users better understand the EU Taxonomy and support companies in their reporting obligations. These tools, including the EU Taxonomy User Guide and the EU Taxonomy Navigator website, aim to improve the usability of the EU Taxonomy and the wider EU sustainable finance framework.
Early Evidence and Impact: Early evidence shows that the EU sustainable finance agenda is working and that the tools in place are starting to facilitate investments in the transition to a climate-neutral and sustainable economy. Initial corporate taxonomy reporting indicates encouraging trends among large non-financial companies, with many reporting increasing values of taxonomy alignment, particularly in their capital expenditure.
These concepts are integral to understanding the European Union's sustainable finance initiatives and the measures put in place to achieve climate neutrality by 2050. If you have further questions or need more detailed information on any of these concepts, feel free to ask!
