Defining sustainable finance has been a rocky road but the first milestone is now in sight

The EU Taxonomy regulation, the spearhead of sustainable finance legislation, is set to start applying at the beginning of 2022. The European Commission recently published a package that included proposed criteria for climate change mitigation and adaptation and reporting. Once the criteria have been translated into all EU languages, the Council and Parliament have a maximum of six months to either approve or reject them.

The taxonomy will require major effort from businesses and supervisory authorities alike. If successful, a common set of definitions will facilitate sustainable investment and make it genuinely comparable.

The Finnish financial services sector endorses this effort. The taxonomy will enable companies to better accumulate funding for their investments towards a carbon-neutral economy.

A common set of definitions
will facilitate sustainable investment
and make it genuinely comparable.

Finance Finland has commented only on a few details in the taxonomy criteria relating to residential construction and the forest industry. In the final proposal, the Commission had wisely listened to the feedback and changed its stance on the energy efficiency criteria of buildings in line with the recommendations of the Technical Expert Group.

On the other hand, the criteria for new buildings remained unchanged. According to the taxonomy, construction in forest areas is not sustainable because it harms biodiversity. In a densely forested country like Finland, this makes finding taxonomy-compliant locations for new buildings difficult: there is not much space fit for construction that does not also grow trees.

Projects that fit the criteria of the taxonomy will have better chances of finding private funding in the coming years. The spread and popularity of the sustainability criteria in the EU could be promoted, for example, by offering expert consultation to businesses and by developing the sustainability reporting further. FFI regards the Commission’s initiative for a European Single Access Point for financial and non-financial information highly supportable. It would be advisable to align the project with the targets of sustainable finance and compile all the relevant sustainability data in the reach of everyone.

Regulatory projects in sustainable finance have had to work through some rough terrain. The ambitious package is extensive, complex and, in many ways, politically challenging. The regulatory work has progressed under a very tight schedule, which has left financial undertakings with little time to make the necessary changes to their operations and systems.

Sustainable finance disclosure regulation requires financial sector companies to update all prospectuses and other financial product documents and publish detailed information on the sustainability impact of their investments. Once the taxonomy regulation becomes applicable, the financial sector will begin to report how much of its financing goes to taxonomy-compliant economic activity. The Commission estimates reaching the EU climate goals will require an annual additional contribution of 175–290 million euros from the private sector. With sustainable economic activity defined, financial companies can use it as the basis for justifying and measuring the sustainability of their funding decisions.