In the ongoing debate around environmental, social and governance (ESG) issues and rising demand for sustainable investments, one major topic of conversation has been taxonomy – defining what does and does not qualify as ‘sustainable’ or ‘green’ investing.
Classification to help investor confidence
Regulators in Europe have been at the vanguard for many ESG-related matters and instrumental in drawing up rules and principles that policymakers in other parts of the world often look to as a guide. The next significant step forward will be the much-anticipated European Union (EU) taxonomy for sustainable activities. By classifying which activities are suitably green, the taxonomy is intended to make investors more confident about what they’re investing in and help drive capital towards sustainable projects.
The regulation covers six core environmental objectives. In respect of the first two, namely climate change mitigation and adaptation, market participants will be required to make their first set of disclosures on the extent to which their activities are taxonomy aligned in January 2022. Disclosures relating to the four remaining objectives will be required as of January 2023.
A demanding but important regulation
Although the regulation is demanding, businesses ought to bear in mind the upside of the EU taxonomy. Setting out the nomenclature should help all parties feel more confident about the subject at hand and mitigate the risk of greenwashing. Living up to these environmental standards is also increasingly important for consumers, as well as employees.
In addition to the reputational concerns, there is ever-mounting evidence to support the argument that green investments are at least as (if not more) profitable than the alternative. Companies with strong ESG credentials will make for increasingly attractive assets and make for welcome additions to portfolios, to say nothing of the part they can play in confronting a darkening environmental reality.
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