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.