The European Parliament adopted on 28/3 the so-called  “Taxonomy regulation”, one of the three legislative initiatives to implement the Sustainable Finance Action Plan.

The Sustainable Finance Action Plan, released by the European Commission in May 2018, aims to redirect capital flows towards sustainable economic activities.

The taxonomy regulation sets criteria to define what economic activities will be deemed ‘sustainable’. This represents an important step for businesses in Europe. A rating of environmental impact will indicate to investors how sustainable a company’s business model is and so could make it more or less attractive to the markets as sustainable finance gains in importance.

Currently, there are different interpretations in Europe about what is a sustainable investment, sometimes defined by a label or national legislation. For the corporate side, this inconsistency means increased administrative work to comply with different definitions in Europe. For investors, it has become difficult to compare sustainable investments across Europe. As a result, there is no level playing field for cross-border investment products.

The new regulation will not establish a European label for sustainable financial products, but instead provide the criteria to be considered for such labels at national or EU level. Finally, there will be no ‘brown’ list, of economic activities judged harmful for the environment, nor will the social aspect of sustainability be considered.

As for the next steps, both the European Parliament and the EU Council need to agree on the final provisions, and EU member states are expected to reach a joint position in May.