Commission to introduce rules to clarify ‘green’ investment in May

Commission Vice-President Valdis Dombrovskis said that lowering the capital requirements for 'green' investment would be based on a "clear" EU classification. [European Commission]

Following the action plan on sustainable finance to be published early next month, the European Commission will present legislation in May to define what represents ‘green’ investment, EURACTIV has learned.

For investors and a group of senior experts on finance, the priority must be to set the criteria to properly classify ‘green investment’ and avoid ‘greenwashing’.

Expert group recommends setting up European standards for ‘green bonds’

An EU sustainability taxonomy, a definition of priority investment areas, the clarification of investor duties and development of “official” European sustainability standards for green bonds are some of the recommendations experts made to the European Commission on Wednesday (31 January).

The Commission agrees this is the “main problem”, officials have told this website.

For that reason, the institution prioritises setting up an EU taxonomy, a unified classification system to apply to all jurisdictions to define what is ‘green’ and what is not.

The EU action plan will be the first step toward this classification. However, the Commission needs more time to develop this taxonomy, officials explained.

To date, only the European Investment Bank uses indicators to assess how ‘green’ investment projects are. But Commission officials said it is not possible to copy/paste these criteria.

Enabling framework

Instead, the Commission is expected to present in May legislation to create an “enabling framework” to properly define what green investment is.

As part of the action plan, the Commission will also look at how to develop incentives to support the development of green assets. One of the ideas is to extend the use of ‘eco-labels’ to financial products once the EU taxonomy has been developed.

More specifically, the Commission is looking into applying these ‘green’ labels to bonds and investment funds.

Another aspect the executive wants to focus on is the “obligation” for investors to explain to their customers how sustainable the financial products really are.

Juncker Plan falls short of offering green projects, expert group says

The high-level group on sustainable finance proposed on Tuesday (18 July) a new platform to match capital and green projects, as the Juncker Plan did not develop the ‘big pipeline’ that was expected to unlock the money resting in the pockets of big investors.

Finally, the Commission is considering introducing a “green supporting factor”. As a first step, the executive is considering lowering the capital requirements for environmental-friendly investment, including energy efficient mortgages or low-emission cars.

Controversial step

Lowering capital requirements is seen as one of the most controversial proposals, given that it could be used by financial institutions to reduce their capital cushions by turning to dubious ‘green’ investments.

Commission Vice-President Valdis Dombrovskis warned last week in Dublin that any measure in this regard “would have to be closely calibrated, and based on a clear EU classification”.

Once the rules are set and the taxonomy is in place, it remains to be seen who would be the main regulator in charge of enforcing them.

One of the potential candidates to lead the governance system would be the European Securities and Markets Authority (ESMA).

But officials have noted that ‘sustainable finance’ affects not only equities and markets but also other financial products and players like institutional investors. In that context, all European Supervisory Authorities (ESAs) may play a role.

Commission wants bigger role for regulators in sustainable finance development

The European Commission has proposed giving the European Supervisory Authorities broader powers to determine what represents environmental, social and governance investment and to monitor banks’ activities in this field.

Take the lead

The EU’s ambition is to “inspire” other jurisdictions to follow the European lead, as Dombrovskis told his audience in Dublin. As the EU would be the first region to establish a classification, other territories could adopt similar criteria.

Green investment is rapidly growing in the world, attracting the interest of financial players and regulators. Europe is playing a significant role in its progress.

According to Standard and Poor’s, $60 billion out of almost $160 billion in green bond issuance last year came from Europe.

Green finance reaches EU policy ‘tipping point’

The mid-term review of the EU’s Capital Markets Union initiative, due on Wednesday (7 June), will mark another step towards the mainstreaming of green finance in Europe, a senior EU official told EURACTIV.

Over the last five years, green bonds issuance increased around 80% in the world, although this year the pace is expected to slow down to a 30% increase to $200 billion.

According to the credit rating agency, more than 150 initiatives related to responsible investment were drafted in Europe last year, half of the total of new rules and standards put forward in the world.

The Commission estimates that Europe would need €180 billion in investments every year to meet the Paris agreement pledge of limiting the global warming to well below 2 C .

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