The publication of the action plan for sustainable finance is a landmark in EU policy regarding ESG issues, climate change mitigation and adaptation. The action plan was accompanied by several legislative proposals with the goal of ensuring that financial products are used to promote sustainable activities and be the engine which drives the EU’s transition to a greener economy.
The most important legislative proposal to look at is the proposal for a regulation on the establishment of a framework to facilitate sustainable investment (or, taxonomy proposal). The taxonomy proposal provides the foundation for sustainable investments in the EU and determines the parameters for which activities are eligible to receive “green” investments.
EuropeanIssuers believes that the challenge for the taxonomy is not to make finance greener but to bring about a greener economy. Therefore, it should be designed to be used as a tool to help companies grow and create jobs whilst facilitating the transition to a sustainable economy.
In order to shape the taxonomy into an effective tool, the regulation needs to address several key issues. The first is a clarification of the term “environmentally sustainable activities”. It is of the utmost importance that the definition for this term does not exclude economic activities per se but allows for an analysis of best practices in terms of environmental performance for each activity.
This assessment should go further than the activity level and measure real performance indicators and benchmarks at the company or even installation level, as was done in the EU Emissions Trading Scheme Directive (ETS Directive). It is also important that the level of granularity in the technical screening criteria is better defined so that a company using environmentally sustainable technologies does not get penalised for being engaged in an activity that is not considered to be sustainable. This give companies room to find innovative solutions and integrate new technologies to improve the sustainability of certain activities.
Another issue is the integration of a forward-looking approach to activities.
The major objective of sustainable finance is to enhance a transformation from “brown” to “green” activities in a continuous way.
While using finance to further enhance “green” activities is an interesting concept, we believe that it is more effective to target less sustainable. If companies develop plans to turn so-called “brown” activities into “green” ones, then these activities should be eligible to raise capital through sustainable finance. When EuropeanIssuers thinks about what transitioning to a green economy looks like, this is what we mean. It is imperative that the focus be on making the unsustainable sustainable.
It is critical for the green transition to involve non-financial companies in the dialogue with other stakeholders. This should be done by strengthening the participation of these companies on the sustainable finance platform. By including non-financial companies on the platform, it ensures for a balanced stakeholder group. Furthermore, it means that environmentally sustainable solutions can be conceived and/or handled by companies in order to create a positive dynamic for the European economy.
Alongside these key issues, there are other aspects that need to be taken into consideration when making the taxonomy effective. The taxonomy should help companies grow and transition in a sustainable manner, but this should not come at the cost of large administrative burdens. The taxonomy could be quite expensive for companies if too many obligations are included.
Currently, the EU is in a race against the clock to meet the 2050 goal of net-zero emissions. EuropeanIssuers firmly believes that this goal can be achieved if the EU acts decisively and focusses on environmental factors.
Due to the urgency of the matter, the taxonomy should not seek to tackle the social impact of investments.
While EuropeanIssuers supports minimum social safeguards, it would be premature to include social criteria immediately in the taxonomy; this will require an in-depth analysis and the identification of appropriate indicators which will need time to be properly addressed.
Other aspects of the taxonomy which would create unnecessary administrative burdens for companies include the requirement for third party verification of compliance with the regulation. Also, including the provisions regarding companies’ due diligence along the supply chain would be a step too far as well. There are best practices when it comes to reporting on these matters, and the non-binding guidelines on climate-related report already provide guidance for companies to follow. Obliging companies to comply by including these provisions in the regulation would create an obstacle that companies would have to spend time overcoming rather than directing resources to sustainable activities and growth.
By making sure that these aspects of the taxonomy have been addressed, we will begin to see significant progress in the transition to a more sustainable economy while still promoting a healthy level of growth for companies across the EU.
It is important to remember that the taxonomy is aimed primarily at financing this transition, therefore the scope of the regulation should only be applied to financial products labelled or marketed as sustainable and to financial market participants offering these products. Going beyond this scope could be counterproductive and not foster implementation of transition strategies.
EuropeanIssuers sees the potential benefits the taxonomy would give to issuers, and we believe that it will be a critical tool in the construction of a robust, sustainable EU economy.
EuropeanIssuers is a pan-European organisation representing the interests of publicly quoted companies across Europe to the EU Institutions. Our members include both national associations and companies from all sectors in 15 European countries, covering markets worth € 7.6 trillion market capitalisation with approximately 8000 companies.
We aim to ensure that EU policy creates an environment in which companies can raise capital through the public markets and can deliver growth over the longer-term. We seek capital markets that serve the interests of their end users, including issuers.
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Secretary General, EuropeanIssuers
Frederico de Santos Martins
Policy Adviser, EuropeanIssuers