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’.
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.
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.
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.
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.
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.
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 .