With the adoption of the EU Green Deal and the proposal for an EU Climate Law, the commitment to become climate neutral by 2050 is likely to become a legally binding obligation. This lack of confidence in sustainable finance is especially problematic for the European Union in upholding its commitments under the Paris Agreement to keep global average temperature well below 2☌ above pre-industrial levels and under the UN Sustainable Development Goals. This was recently the case for a ‘green’ bond issued for purchasing fuel-efficient tankers for the transport of oil from offshore drilling sites. Numerous examples of borderline cases seemed to provoke some controversy about where to draw the line between being sustainable and gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met (greenwashing). Leaving it to the market or member states to define ESG was deemed to lead to different and incomparable concepts which could diminish confidence in sustainable finance and hamper the functioning of the internal market. In particular the latter Action Plan’s goal to reorient capital flows towards sustainable investments justified the adoption of a detailed EU classification system-or taxonomy-to make it clear for investors which activities qualify as ‘green’ or ‘sustainable’. Creating such a legal framework pioneered as a priority in the Action Plan on Building a Capital Markets Union of 2015 and was translated into more concrete policy in the Action Plan: Financing Sustainable Growth of 2018 based on a blueprint designed by the High-Level Expert Group on Sustainable Finance. The definition of what makes an economic activity sustainable will lie at the center of an emerging legal framework for sustainable finance. More specifically, it sets out the broader framework within which the European Commission will set the technical criteria an economic activity must adhere to in order to be considered environmentally sustainable. On 18 June 2020 the European Parliament decided to remedy the lack of clarity by adopting the Taxonomy Regulation (TR) which defines the concept of ‘an environmentally sustainable economic activity’. In sharp contrast to this emphasis on the importance for investors to take ESG factors on board when making investment decisions stands the uncertainty about the requirements an investment must meet to be actually sustainable. At the same time there is an omnipresent call to align the economic recovery in Europe with the ‘green transition’. Funds that took due account of environmental, social and governance (ESG) factors in their investment strategies generally outperformed their conventional counterparts during the COVID-19 pandemic.
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