05 December 2019

POLITICO: Europe defines what financiers can call ‘green’

The ‘taxonomy’ law aims to attract much-needed capital to meet EU climate goals. With Europe’s green push comes new business opportunities — but Brussels wants to ensure they’re the right ones.

EU legislators on Thursday reached a provisional agreement on rules meant to clarify what counts as “green” finance. From its name — the taxonomy regulation — to the highly technical provisions on what can labeled as sustainable, the initiative seems obscure and complex.

But the agreement of the European Parliament, Council and Commission stands to be a crucial step in raising the money needed to meet the bloc's climate goals.

"The EU’s green standard will mean investors can no longer be sold fake green investments. If we want to halt climate change we need money to be flowing towards good things," said William Todts, executive director of NGO Transport & Environment.

The Commission has big plans for the taxonomy. It will be the basis for an EU standard for green bonds and for an ecolabel for retail investment products, as part of the green financing strategy that Commission Executive Vice President Valdis Dombrovskis is working on.

It may also be used to facilitate banks’ loaning to green projects — something the Commission is considering as part of its review of banks’ capital requirements.

Without a common definition for sustainable investment, financial firms can market products as green without disclosing their environmental credentials. The legislation will oblige them to measure investment products against a binding EU standard and disclose to what extent they align with it.

In the future, the taxonomy could also be the basis for a “green supporting factor,” letting banks hold less capital for projects aligned with the EU’s definition of sustainable investments. EU capital requirements are now under review, and one of the questions asked by the Commission is whether there should be "dedicated prudential treatment" for assets "associated substantially with environmental and/or social objectives."

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