ESTABLISHMENT OF A FRAMEWORK TO FACILITATE SUSTAINABLE INVESTEMENT
In “Economic and Monetary Affairs - ECON”
The proposal forms an integral part of the EU’s efforts, under its Capital Market Union project, to connect finance with needs of the economy and the EU’s sustainable development agenda. This proposal should facilitate investments in sustainable projects and assets across the EU.
The proposal is part of a package put forward by the European Commission on 24 May 2018 and announced in its Action Plan on Sustainable Finance in March 2018. The aim is to include environmental, social and governance (ESG) considerations in the decision-making process of investors and asset managers.
The Commission established in December 2016 a High-Level Expert Group (HLEG) to develop a comprehensive EU strategy on sustainable finance. The expert group published its final report on 31 January 2018. In the report, the expert group issued eight key recommendations, which it believes are the essential building blocks of a sustainable European financial system. The advice of the expert group was to start, as a first step, with establishing when an economic activity can be considered as environmentally sustainable. This proposal address this priority indicated by the expert group.
The proposal sets out uniform criteria for determining whether an economic activity is environmentally sustainable. It further sets out a process involving a multi-stakeholder platform to establish a unified EU classification system (EU taxonomy) based on a set of specific criteria, in order to determine which economic activities are considered sustainable.
The aim is a gradual development of an EU taxonomy for climate change and environmentally and socially sustainable activities. According to the Commission, such EU taxonomy will be embedded in future EU law and provide the basis for using that classification system in different areas (e.g. standards, labels, sustainability benchmarks).
Currently Member States differ in their interpretations as to what counts as sustainable investment. Some Member States have in place labelling schemes or market led initiatives to determine what qualifies as green for investment purposes, others do not have any rule in place but are likely to legislate in this field based on their own definition of sustainable investments.
National labels based on different criteria as to which economic activities qualify as environmentally sustainable make it difficult for investors to compare green investment, thus discouraging them from investing cross borders. Existing divergences are also a burden on economic operators having to comply with different standards in different Member States.
According to the Commission, more and more Member States are likely to explore the option of introducing labels for sustainable financial products, using their own bespoke taxonomies. This would exacerbate national barriers to the operation of capital markets for raising funds for sustainable projects. Diversifying classification systems would increase market fragmentation and raise competition problems.
According to the Commission, the criteria for determining what constitutes a sustainable activity for investment purposes should be standardised at EU level. This proposal launches a gradual process for the establishment of an EU classification system, involving a broad range of stakeholders with the relevant knowledge and expertise and taking into account that it would be an evolving tool as the sustainability subject is rapidly evolving itself.
In the European Parliament, the dossier was assigned initially to the ECON Committee. Rapporteurs and Shadow rapporteurs were appointed. A Committee draft report has been produced.
On 13 November 2018, the referral to joint committee (art.55 Rules of procedures EP) was announced in Parliament. ECON and ENVI Committees have been assigned jointly the dossier.
On 11 March 2019, the joint committee adopted its report on the proposal, welcoming the legislative proposal, while calling for a number of changes.
The joint report has been be voted during the Parliament's March II plenary session. European Parliament adopted its position.
On 25 September 2019, the Council agreed a common position on the dossier.
After trilogues, European Parliament and Council reached an agreement on 18 December 2019.
The new rules will be formally adopted by the Council and the Parliament following the legal and linguistic revision of the text.
On 15 April 2020, the Council has adopted the regulation. The regulation now needs to be adopted by the European Parliament at second reading before it can be published in the Official Journal and enter into force.
On 23 April 2020, the European Commission published a Communication to the European Parliament stating that Council's position at first reading correctly reflected the outcome of the political agreement that was reached and that the Commission supports this agreement.
On 28 May 2020, the Committees on Economic and Monetary Affairs and on Environment, Public Health and Food Safety will vote in joint committee on the recommendation for second reading for the proposal on the EU Taxonomy. Earlier, the Council's position at first reading was officially announced in Plenary.
On 18 June 2020, the European Parliament adopted the regulation in Plenary.
References:
- EP Legislative Observatory, Procedural file on Framework to facilitate sustainable investment, 2018/0178(COD)
- European Commission, Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment, COM(2018)353
- European Commission, Action Plan on Financing Sustainable Growth, COM(2018)97
- European Commission, Impact Assessment on the Proposal COM (2018) 265
- High Level Expert Group on Sustainable Finance, Final Report
- Council, Press release on agreement with European Parliament
- Council, Council's position at first reading
- European Commission, EC communication to the European Parliament - 23 April 2020
Further reading:
- European Commission, Defining “green” in the context of green finance
- European Parliament, Resolution of 29 May 2018 on Sustainable finance (2018/2007(INI))
- European Parliamentary Research Service, An EU framework to facilitate investments in environmentally sustainable economic activities
Author: Stefano Spinaci, Members' Research Service, legislative-train@europarl.europa.eu