What is ‘green’ or ‘sustainable’ investment? EU might have the answer

It is no news that we are standing in front of, or perhaps already within, a climate crisis. Between 1980 and 2017, economic losses caused by weather and climate-related extremes in the EU amounted in more than EUR 450 billion. The climate emergency leaves us with no choice but a transit to a climate-neutral economy. However, if we are to reach the EU’s target to become a climate-neutral economy by 2050, capital flows need to be directed towards such transition, and only the EU would need an additional EUR 175–290 billion in private investment per year in order to achieve this.

The market has started to respond to this obvious gap. Sustainable investment as a field has grown rapidly during the past years and has transitioned from being a niche area to mainstream. Sustainable investing, i.e. investing along environmental, social and governance (ESG) criteria is one of the fastest-growing strategies in finance, and within ESG, it’s the “E” that has recieved the most attention. Market is facing a positive problem: investors’ demand for sustainable investments already surpasses offering.

However, an itching problem is starting to bother investors more and more, namely what counts as a ‘green’, or ‘sustainable’ investment? How do we really measure and compare green and sustainable investments? Although a number of initiatives on how to report sustainability measures have emerged, there is currently no single sustainability standard available. So who will take on the challenge to bring a common language to this field? It appears as if the EU has taken it on its shoulder to lead the way.

The EU has long expressed its wish to take the global lead in promoting sustainable finance. In March 2018, the EU showed that it is serious about taking the leading role in reforming the financial system to support the transition towards a sustainable economy, by adopting the ‘Action Plan on Financing Sustainable Growth’. One of Action Plan’s aims is to set down conditions and frameworks in order to develop a clear and unified classification system, or taxonomy, for environmentally sustainable economic activities.

While expectations on the taxonomy are undoubtedly high, the main question is whether the taxonomy actually will manage its task – to direct capital flows toward a more sustainable economy. Critical voices have pointed out that a taxonomy could counteraction and instead lead to a decrease in ambition level amongst those already passing the bar for what is considered ‘green’. Another concern brought forward is with sustainability and science rapidly developing, there is a risk that what we consider sustainable or green today, might not be so in the future, which could risk the practical usefulness of the taxonomy. Despite some concerns, the taxonomy would nonetheless contribute to a standardized, science-based classification system and provide some alleviation to the fare of greenwashing.

The goal is clear – we need to achieve a carbon-neutral economy – and so is the time line – now.