Summary by Elena Dima, Economist, MSc International Political Economy & European Social Policy →

The Paris Agreement, established in 2016, aims to limit global warming to well below 2 degrees Celsius compared to pre-industrial levels. In 2019, the European Commission presented the European Green Deal, which outlines a detailed plan for Europe to become the first climate-neutral continent by 2050. These two agreements have increased global awareness of the environmental damage caused by past industrial practices and emphasized the need for a transition toward more sustainable economic activities

The European authorities have launched an ambitious new framework that promotes environmentally responsible decision-making among governments, financial institutions, and other key economic actors and stakeholders within the EU. This framework is designed to support the goals of the European Green Deal by encouraging the adoption of sustainable practices.

The Taxonomy Regulation (EU) 2020/852, along with the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainable Reporting Directive (CSRD), which will replace the Non-Financial Reporting Directive (NFRD), establishes a framework for monitoring, assessing, and reporting on the environmental alignment and performance of economic activities. This framework applies to financial markets, corporations, investors, and the public sector, and aims to promote transparency and accountability in their environmental practices.

Enhancing data and methodologies is essential for scaling up action to tackle climate change and furthering the growth of sustainable finance. While these tools may seem technical and complex, they play a critical role in directing investment funds toward sustainable projects and implementing science-based, forward-looking policies to achieve environmental objectives and support a sustainable transition.

EU Taxonomy: A common language for sustainability investment efforts

The Taxonomy Regulation (ΕΕ) 2020/852 is part of the EU’s sustainable finance agenda, which aims to mobilize public and private capital toward green and low – carbon project and activities. The EU’s sustainable finance taxonomy is a science–based classification system that aims to guide financial decisions in response to the global climate and environmental emergency. It provides clear definitions and reporting standards to support more finance for activities that substantially contribute (SC) to the EU’s environmental objectives while doing no significant harm (DNSH) to any of those objectives and meeting minimum safeguards. In other words, the EU Taxonomy creates a common language to measure, calculate and compare sustainable progress.

Economic activity is aligned with the EU taxonomy if it meets four conditions:

  1. It makes a substantial contribution to one of six environmental objectives
  2. It does no significant harm (DNSH) to the other five environmental objectives.
  3. The company/entity as a whole meets minimum social safeguards (MSS).
  4. It complies with the Technical Screening Criteria (TSC) which are quantitative and qualitative thresholds or conditions that an activity must meet in order to claim that it makes a substantial contribution to an environmental objective and does no significant harm to the other objectives.

SFDR & CSRD: Two critical interventions to combat greenwashing

The sustainability related disclosures in the Financial Services Sector classify sustainable financial products, based on Taxonomy Regulation and article 2 (17) of the SFDR. Financial market participants are required to disclose reliable information about sustainability risks, principal adverse sustainability impacts (PAIs), and ESG factors in their investment decisions through various means, including pre-contractual disclosures, online product disclosures, and periodic reports. Financial advisors must also explain how they consider negative externalities in their investment or insurance advice and the results of their assessment of the potential impact of sustainability risks on investment returns. This ensures that end-investors have the necessary information to make informed investment decisions. The SFDR Regulation and the Taxonomy Regulation strive to promote transparency,  combat greenwashing, and support companies in their genuine efforts to shift towards more sustainable business practices.

Overall,, the SFDR and Taxonomy Regulations aim to significantly increase transparency in order to combat greenwashing and support genuine efforts towards more sustainable business practices. By promoting greater transparency, these regulations seek to reward companies that are truly committed to transforming their operations in a more sustainable direction.

The first reports under the CSRD must be submitted by 2025 (covering the 2024 fiscal year) for companies subject to the NFRD. The CSRD which is now in its final phase, aims to achieve the following main objectives:

  • The scope of reporting requirements will be significantly expanded to include additional companies
  • Establish binding sustainability reporting standards that define the scope and content, and require the inclusion of Taxonomy aligned data
  • Publish all management reports in electronic format, with sustainability data digitally labeled
  • Require third–part verification of reported sustainability data.

CSRD: Timetable and scope

Initiatives to incorporate sustainability into state budgets

The 2019 Green Deal Communication highlights the role of green budgeting in ‘’redirecting public investment, consumption and taxation to green priorities and away from harmful subsidies’’. Since 2021, green budget reporting has incorporated new and more effective methods. Almost two-thirds of the Member States have established or plan to introduce some form green budgeting. Most countries that use green budgeting are applying green budget tagging or environmental impact assessments to cover a wide range of environmental goals. The assessments are a key aspect of budgeting as they help to evaluate the impact and effectiveness of government policies in achieving the climate and environmental objectives.

According to Recovery and Resilience Facility Regulation (RRF), the assessment of the Recovery and Resilience Plans (RRPs) should ensure that every measure in the plan complies with the do no significant harm principle. Some countries have demonstrated strong commitment to the process by enhancing green budgeting in their RRPs. However, to accomplish the goals outlined in the European Climate Law, 8th Environmental Action Programme, Biodiversity Strategy for 2030, and Law on Nature Restoration, it is essential to integrate climate and biodiversity considerations more ambitiously into state budgets and RRPs. This will help ensure that the recovery and climate transition efforts are aligned with the long-term goals of achieving a sustainable and resilient future.

It is important to note that integrating climate and biodiversity considerations into fiscal planning must also account for the risks posed by climate disasters. This will help to strengthen the resilience of public budgets to the shocks and uncertainties associated with climate change and biodiversity loss. Fiscal planning must anticipate the potential costs and benefits of climate action, as well as the trade-offs and synergies between different policy objectives. Effective administrative and institutional arrangements are necessary to facilitate the coordination and implementation of climate policies across different levels and areas of governance.

Harmonization of global sustainability standards

The Financial  Stability Board established the Task Force on Climate – related Financial Disclosures (TCFD) in 2015 to address the fragmentation of climate reporting and to improve firms’ climate disclosure. The TCFD  recommendations were presented to the G20 leaders and have been widely demanded by financial sector. Regulators and policymakers in multiple jurisdictions have also used the TCFD as a basis for their disclosure rules and requirements, recognizing its importance. The TCFD is a  globally accepted framework that the private sector created to ensure that investors and other stakeholders can access the data.

On 26 June 2023, the International Sustainability Standards Board  (ISSB) issued its inaugural standards – IFRS S1 and IFRS S2 – making a new era of  sustainability–related disclosures in capital markets worldwide. These standards address disclosures requirements related to an entity’s governance, strategy, risk management and sustainability -related metrics and targets. They build on the initiatives and Frameworks created by the TCFD. However, even with widespread disclosure (SEC, GRI, IPSASB etc.) there were still challenges with accessing and comparing data across institutions. A group of policymakers, regulators, standard setters and leaders of international organizations is needed to try to address the gaps and guide the development of a global platform solution that could bring greater standardization and transparency to climate data.

Assessing and measuring the impact on Nature: A critical and ongoing challenge

Nature restoration remains a crucial issue that poses significant risks to economies, the financial system, society and communities. The risk is clear, but its location and measurement are not. This is one of the major challenges that Taskforce on Nature – related Financial Disclosures(TNFD), the  Science Based Targets – SBTi,  the Science-Based Target Network,  the Aligning Accounting Approaches for Nature  are trying to address, following the example of the TCFD. Nature and climate are interrelated. Climate change creates physical risks that affect the nature system, such as droughts, floods, and damage to production. The nature system also offers solutions to mitigate greenhouse gas emissions, such soil carbon sequestration, forest conservation, and ocean carbon storage. We need to consider these aspects in an integrated way, even though we started by focusing on climate.

In December 2022, COP15 of the Convention on Biological Diversity noted that there is still no generally accepted methodology for measuring the progress made in ecosystem restoration.

At the end of 2022, a landmark global agreement to halt and reverse biodiversity loss was adopted at the 15th Conference of Parties (COP15) of the Convention on Biological Diversity (CBD) – the Kunming – Montreal Global Biodiversity Framework. Meanwhile, the European regulation dedicated to nature restoration was adopted on July 12, 2023. To truly respond to global demands and challenges, the 28th United Nations Climate Change Conference (COP28) and the session of the Conference of the Parties need to focus on the development of sustainable strategies for 2030 and the associated finance tools based on innovative methods and approaches.