The European Parliament has adopted new criteria on sustainable investments to help the EU achieve its climate-neutral goals.
The legislation comprises six environmental objectives to boost green investments.
These include climate change mitigation (avoiding/reducing greenhouse gas emissions or increasing greenhouse gas removal), as well as climate change adaptation (reducing or preventing adverse impact on current or expected future climate, or the risks of such adverse impact).
The others are sustainable use and protection of water and marine resources, transition to a circular economy (focusing on the reuse and recycling of resources), pollution prevention and control as well as protection and restoration of biodiversity and ecosystems.
The law allows economic activity to be labelled as “environmentally sustainable” if it contributes to at least one of the objectives without “significantly harming” any of the others.
Establishing clear European “green” criteria for investors is seen as “key” to raising more public and private funding so that the EU can become carbon neutral by 2050 as set out in the European Green Deal.
The rules will also help to prevent “greenwashing” by providing clear criteria on what exactly is sustainable and eco-friendly.
This will help avoid some funding from being directed to projects that claim to be green, but in reality are not.
Activities that are incompatible with climate neutrality but considered necessary in the transition to a climate-neutral economy are labelled “transition” or “enabling” activities.
They must have greenhouse gas emissions levels corresponding to the best performance in the sector, under the new law.
While solid fossil fuels, such as coal or lignite, are excluded, gas and nuclear energy could potentially be labelled as an enabling or transitional activity in full respect of the “do no significant harm” principle.
The European Commission estimates that Europe needs around €260bn a year in extra investment to achieve its 2030 climate and energy targets.
In a resolution on 15 May MEPs also called for investments under the Covid-19 recovery plan to be prioritised as part of the Green Deal.
Environmental Committee lead negotiator 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 said: “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.”
The law enters into force after publication in the European Parliament’s Official Journal.