Climate change is broadly acknowledged as one of the key risks to financial stability. The European Commission has responded to this challenge, by planning to motivate European businesses to become carbon neutral by 2050. However, there is a lack of a universally accepted measurement for business greenness. This lack of a taxonomy of green definitions has profound practical implications for business.
In the early days of climate anxiety, business answers were freeform and sometimes a bit hit-and-miss. Consequently, it is difficult to decipher what was green enough, what was good enough, and what was just, greenwash. Furthermore, the lack of definition has created challenges for people investing in green technologies, through a growing array of green financial instruments.
Consequently, the European Commission put its plan into practice. A 30-strong technical experts’ group is currently completing work on compiling a taxonomy of green definitions. Once completed, the taxonomy will provide businesses obeying European Union regulations, a detailed blueprint for achieving carbon neutrality by 2050 and being measured accurately.
However, defining those actions, for sectors from electricity production to cement production to steel production to car production to education and ICT and health services, is a humongous work. Moreover, it is about change through market-based approaches, labeling and setting the standards for green activities.
Once in place, the taxonomy will transform the financial markets. It will offer a sounder understanding of the economic activities that genuinely count as green and can help reduce the risk of climate change. Additionally, it is expected that standardizing definitions of greenness through the taxonomy will expand the green markets further. This, in turn, will make it easier for commercial investors and central banks to choose their investments keeping their green policy in mind.
Furthermore, a significant development occurred on March 28, 2019. The European Parliament has agreed to the European Commission’s position on the sustainability taxonomy. Both institutions believe that sustainability taxonomy will set the framework for establishing which economic activities will contribute substantially to environmental objectives like climate change mitigation.
The proposal is one of the three legislative proposals in the European Commission’s sustainable finance action plan, which is being implemented at a rapid pace. The proposal on the taxonomy was voted on in the parliamentary economic and monetary affairs and environment committees earlier this month. However, in contrast to the other two proposals—on low carbon benchmarks and reporting obligations — political agreement has not been reached on the sustainability taxonomy proposal.
The need for a full fledged taxonomy ranking all economic activities by their environmental performance, and not merely limiting itself to capturing dark green activities, is the primary bone of contention. The subsequent step is for the European Union Council, the body for European Union member states, to adopt its position, and then negotiations can begin. Nevertheless, an agreement on the final position is expected by April 2019.
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