The European Parliament announced today that it has adopted new rules to determine whether an economic activity can be defined as environmentally sustainable.

The new legislation marks a significant milestone in the regulation of sustainable investing and sustainable finance, as demand and usage of each is anticipated to continue growing rapidly in coming years, particularly in Europe.

In December 2019, The European Commission presented the European Green Deal, a roadmap for making the EU’s economy sustainable, setting ambitious climate and energy targets for 2030, and a continental goal of zero net emissions by 2050. Achieving these goals, however, will require substantial investment, with €260 billion estimated to be needed by 2030.

In order to facilitate the significant level of financing that will be required for this transition, which will be made up of a combination of public and private investment, clear criteria defining what exactly is sustainable and eco-friendly will be required. Clear definitions will also help to avoid misdirecting funding “greenwashing” projects that appear to be green, but in reality are not.

The newly adopted legislation allows economic activity to be labelled as environmentally sustainable if it contributes to at least one of six environmental objectives without significantly harming any of the others. The six objectives are:

• climate change mitigation and adaptation;
• sustainable use and protection of water and marine resources;
• transition to a circular economy, including waste prevention and increasing the uptake of secondary raw materials;
• pollution prevention and control; and
• protection and restoration of biodiversity and ecosystems.

Commenting on the newly adopted legislation, European Parliament Member and lead negotiator for the Environment Committee, Sirpa Pietikainen, said:

“The taxonomy for sustainable investment is probably the most important development for finance since accounting. It will be a game changer in the fight against climate change. Greening the financial sector is a first step towards making investments serve the transition to a carbon-neutral economy.”

Economic Affairs Committee rapporteur Bas Eickhout added:

“All financial products that claim to be sustainable will have to prove it following strict and ambitious EU criteria. The legislation also includes a clear mandate for the Commission to start defining environmentally harmful activities. Phasing out those activities and investments is as important to achieving climate neutrality as supporting decarbonised activities.”