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The EU Action Plan on Sustainable Finance was adopted in March 2018 to address this

investment challenge. This is part of the efforts of the Capital Markets Union (CMU) to
link finance with the specific needs of the European economy for the benefit of our
planet and society.

In March 2018, the European Commission adopted a sustainable finance action plan as
part of its strategy to integrate environmental, social and governance considerations into
its financial and mobilizing policy framework. financing for sustainable growth. In May
2018, the Commission published the first legal package under the action plan. The four
recommendations included in the package are:
(1) EU unified "classification" classification system, 1 (2) investor information and duties,
(3) low carbon standards, (4) better advice to customers on Sustainability 2. In July 2018,
the Commission also established a Technical Expert Group on Sustainable Finance (TEG)
to provide information on the Action Plan, particularly regarding the development of a
classification system for financial institutions. sustainable economic performance, EU
green bond standards, methods for low carbon emissions indicators and climate-related
disclosure measures.

The first action plan on sustainable finance to date has mainly led to regulatory
initiatives, which include:

Define environmentally sustainable economic activities, specifically economic activities


that make an important contribution to climate change mitigation or adaptation

Introduce transparency requirements for financial products and companies as to


whether they take into account sustainability risks posed by investments or resulting
from economic activity made or not and how they account for and minimize negative
environmental and social impacts. matters arising from investment or the conduct of
economic activity3
In the end, ESG (environmental, social and governance) is high on the regulatory
agenda. The COVID-19 pandemic has allayed fears that it might slip off the radar. The
crisis has highlighted how the corporate sector is highly connected across borders, how
vulnerable societies of all types and levels of affluence are, and how the environment is
deteriorating. distortion. There is strong momentum to change the financial services
landscape for the better. However, companies will need to balance increasing ESG
credibility with the need to weather the impact of the crisis and address issues such as
credit risk, cost savings and consolidation.4
For banks and insurers, the financial risks of climate change are in the spotlight as
regulators formulate expectations for stress testing and climate risk management.
Regulators and investors are asking wealth and fund managers and asset owners to
incorporate sustainable investing across their operations and consider the full spectrum
of ESG.5

The EU Taxonomy is a classification system that creates a list of environmentally


sustainable economic activities. It could play a key role in helping the EU increase

1
https://www.geektime.com/eu-taxonomy-and-sfdr-explained/
2
https://eu-taxonomy.info/info/eu-taxonomy-overview
3
https://www.unpri.org/eu-policy/implementing-the-eu-taxonomy-an-update-to-the-pris-testing-the-
taxonomy-report/9807.article
4
Methodology of Taxonomy G. S. de Hoog Taxon Vol. 30, No. 4 (Nov., 1981), pp. 779-783 (5 pages)
5
https://doi.org/10.2307/1220079 https://www.jstor.org/stable/1220079
sustainable investment and deliver the European Green Deal. The EU taxonomy
provides companies, investors and policy makers with an adequate definition of
economic activities that are considered environmentally sustainable. In this way, it keeps
investors safe, protects retail investors from greenwashing, makes companies more
climate-friendly, reduces market fragmentation, and shifts investment to where it is
needed most.

The EU Classification Regulation establishes a classification of sustainable economic


activities for each of the EU's environmental goals - namely climate change mitigation,
climate change adaptation, pollution prevention, weekly economic recovery, marine
resource protection, ecosystem health - which (i) significantly contributes to the
achievement of at least one of the objectives (ii) without significantly harming any of the
objectives. any of the remaining 5 objectives (iii) while respecting minimum governance
and social guarantees.
The EU Classification Regulation also sets forth requirements for transparency:

Regarding the proportion of investments in environmentally sustainable economic


activities for financial products within the SFDR that feature environmental
sustainability or investment sustainability as an objective and,
The KPIs show the alignment of activities carried out by companies that comply with the
Non-Financial Reporting Directive (NFRD) (EU public utility companies employing
more than 500 people, including about 11,700 companies). and corporations) with
economic activities listed in the EU classification system.
The Taxonomy is a category machine for firms to perceive which in their monetary
sports, or the monetary sports they make investments in, may be deemed
'environmentally sustainable'. The Taxonomy defines environmentally sustainable sports
as monetary sports that make a good sized contribution to at the least one of the EU's
environmental targets, while, on the identical time, now no longer substantially harming
any of those targets and assembly minimal social safeguards. All monetary marketplace
participants, all big groups and indexed SMEs companies will want to file towards the
Taxonomy. (Subject to the final results of the EU political negotiations at the Corporate
Sustainability Reporting Directive.)6

In order for a monetary interest to satisfy the definition of environmentally sustainable


and for this reason be taken into consideration Taxonomy-aligned, it must:

 Contribute appreciably to 1 or extra of the six environmental targets, and follow


the applicable technical screening standards
 Do no giant harm (DNSH) to every other environmental goal
 Comply with minimal social safeguards

6
https://www.bloomberg.com/professional/blog/what-the-eu-esg-taxonomy-requires-you-to-report-and-
when/

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