180 billion euros of investments in low-carbon and energy efficient technology is needed annually in Europe in order to reach the Paris climate goals, the European Commission has estimated. “Meanwhile, the scale of global financial markets is about 85 trillion dollars. Out of these financial flows, some 30 trillion will need to be disinvested as a result of the looming climate risk”, according to Sirpa Pietikäinen, lead negotiator for the EPP group on the EU’s sustainable finance legislative package. “At the same time, trillions are invested in fossil fuel subsidies. By correcting the incentives of market actors this amount can but put in better use in support of sustainable innovation and technology.”
Today the European Parliament voted in favour of a report establishing criteria for what can be labelled in future as a sustainable financial product, a sustainable taxonomy. An independent platform of experts will look into criteria for climate change mitigation and adaptation, protection of marine resources and biodiversity, transition to a circular economy, and prevention of waste and pollution. In the first stage the taxonomy will focus on environmental impact.
While striving for a significant contribution to one of these environmental objectives, important safeguards are put in place ensuring that an investment must not significantly harm any other environmental objective nor internationally accepted OECD and United Nations human rights principles and standards for business conduct. “Palm oil is a case in point for an investment that may be beneficial from climate mitigation point of view but meanwhile seriously reduces the existing rain forests and therefore erodes biodiversity”, Ms Pietikäinen points out.
The report foresees that in future review, the legislators should look into developing criteria for unsustainable economic activities. “It would have been crucial to already empower the expert platform to establish such negative criteria. Fortunately, the report foresees this through a future review of the regulation”. The adopted report also clarifies that power generation activities that produce non-renewable waste, such as nuclear, that use fossil fuels or contribute to carbon intensive lock-in effects, should not be given a green label.
Introduction of corporate reporting standards did not reach the required majority in the final text. The report nevertheless leaves this also open in a future legislative review. Ms Pietikäinen underlines that in order for investors to fulfil their fiduciary duty towards an end-investor who wants to know where their money goes to, there is a need to start asking corporates to report on their activities’ environmental footprint. “Sooner rather than later, we will need to update corporate reporting rules to cover environmental impact of businesses similarly just as today we have rules for financial accounting in annual management reports.”
As negotiator Ms Pietikäinen advocated for development of harmonised sustainability indicators and life cycle assessment methodology as basis for measuring environmental impact. “For investors to make informed choices, they need harmonised and comparable information and a common methodology behind how it is calculated, taking into account the full life cycles of an economic activity.”
A separate legislation on disclosure rules where political agreement among legislators was recently reached will soon oblige large financial institutions employing 500 persons or more to disclosure the environmental impact of their activities – or provide an explanation why such disclosure is not provided. “This is a significant step towards transparency and will incentivise financial institutions towards a change. Greening the financial sector is becoming an urgency in order to make investment decisions that affect years and generations to come based on correct information.”
Regulation for the establishment of a framework to facilitate sustainable investment: http://www.europarl.europa.eu/doceo/document/A-8-2019-0175_EN.pdf (committee report)
Regulation for disclosures relating to sustainable investments and sustainability risks: http://www.europarl.europa.eu/doceo/document/A-8-2018-0363_EN.pdf (committee report)
Further information: Sirpa Pietikäinen +358 50 4666 222, email@example.com