The European Union (EU) has approved the implementation of common rules for sustainable investing that aim to clamp down on greenwash in the finance industry.
The EU Sustainable Finance Taxonomy is a classification system that standardises the labelling of sustainable financial products. Agreed last week by the European Parliament in Brussels, the new system consist of three levels of sustainability, labelled from brown to green, and includes a do-no-harm test. It will mean that investments in natural gas or nuclear energy can no longer be considered sustainable.
Its implementation allows for greater context to be placed around environmental data for both investors and companies.
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In order to qualify as sustainable, a finance product such as a bond must satisfy several conditions. For instance, it must contribute to one of the EU’s environmental objectives, must not cause harm to any of the EU environmental objectives, and must comply with minimum social safeguards.
The environmental objectives of the framework include climate change mitigation and adaptation, sustainable use of water, transition to a circular economy, pollution prevention, and biodiversity.
“It is an elegant solution and fantastically integrates and expands sustainability in finance,” said Maarten Biermans, head of sustainable capital markets, for Dutch multinational finance group, Rabobank. “The change has come much quicker than expected, but still more needs to be done,” he told Eco-Business.
The classification system was proposed by the High Level Expert Group on Sustainable Finance, a team of experts appointed by the European Commission, in 2017 and is now being implemented by the Technical Expert Group, which consists of 35 members from varying fields including civil society, academia, and the finance sector.
“While the taxonomy is voluntary, it will encourage more participants in responsible investing,” said Biermans.
With the European Investment Bank pledging to stop investment of fossil fuels within the next two years, market and political pressures are pushing for climate action. The head of the European Central Bank, Christine Lagarde and International Monetary Fund, Kristalina Georgieva, have made strong statements about the importance of climate action.
[The taxonomy] “will help to address greenwashing to some extent, noting that many investors still consider transitional activities [investments that support the transition to a low-carbon economy, but are not yet themselves low-carbon] as a lighter shade of green,” said Martijn Hoogerwerf, director of sustainable finance at ING Bank Asia Pacific.
Though promising, “the taxonomy still allows room for interpretation that may result in misalignment in reporting,” he said, noting that no guidance for how to adhere to the framework’s rulebook has been issued.
Asian financial markets will be watching how the EU’s new system plays out.
“While the EU taxonomy will become a global reference point, it has been created to meet the EU’s Paris climate goals and does not necessarily take into account the improvements needed, or local market conditions in the rest of the world,” said Hoogerwerf.
In Southeast Asia, banks have established sustainable finance principles, but only relatively recently. In February, the Philippines Securities and Exchange Commission issued sustainability reporting guidelines for publicly listed companies. Over the last few years Vietnam, Thailand, Malaysia, and Singapore have also set out guidelines for banks to develop policies on environmentally or socially sensitive sectors.
According to a report released this week from World Wide Fund for Nature (WWF), titled Sustainable Banking Regulation in Asean, regulators in the region are increasingly pressuring banks to make sustainability
an integral part of their business strategies.