Climate change and environmental degradation define the global challenges of our time. Countries around the world recognize the urgent need to address these challenges, as evidenced by their support for the Paris Agreement and the United Nations’ 2030 Agenda for Sustainable Development, and set ambitious goals. In line with the European Green Deal, the EU has made several ambitious commitments, above all to become the first climate-neutral continent in 2050 and to reduce greenhouse gas emissions by at least 55% in 2030 compared to 1990 levels. The EU also aims to strengthen resilience to climate change, reverse biodiversity loss and further environmental degradation and leave no one behind in the process. To achieve these goals, coordination of all sources of finance – public and private, national and international – is required. The EU must cooperate internationally and cooperate with low and middle income countries during the transition.

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A sustainable EU financial system will play a key role in achieving these goals and supporting a sustainable recovery from the COVID crisis. In this decade, Europe needs about 350 billion euros in additional investment every year to reach the 2030 goal of reducing emissions in the energy system alone, with 130 billion euros needed for other environmental goals 3 . Investments in unsustainable activities and assets will further stagnate, as climate and environmental challenges increase. Inadequate sharing of these risks prevents the reallocation of resources and risks, leading to disruptive adjustments in the future, with implications for financial stability. Therefore, environmental management must be complemented by a sustainable financial system that facilitates financing and investment that reduces climate burdens and environmental risks 4 .

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A sustainable financial system can enable public authorities to access sustainable capital. The EU has taken important steps in this regard. In the Financial Framework for the Year 2021-2027 (MFF) and Next-Generation-EU (NGEU) 5, the Union aims to spend up to 605 billion euros for projects dealing with the climate crisis and 100 billion euros for projects supporting biodiversity. Of the 750 billion euros allocated to the Next Generation-EU, 30% will be raised through the issuance of NGEU green bonds. As the “Climate Bank of the European Union”, the European Investment Bank Group has also taken important steps to support the transition 6 .

As the level of investment required exceeds the capacity of the public sector, the main objective of a sustainable financial system is to direct private financial flows into relevant economic activities. Private interest in sustainable investment has increased in recent years, but it requires a sustainable financial system that is open, stable and strong. The EU implements this system.

A sustainable financial system and capital market integration strengthens all sides, creating more opportunities for businesses and investors. An integrated and efficient capital market must be a catalyst for better capital mobilization and sustainable investment allocation 7 . The dynamics of the sustainable monetary policy agenda increase the importance and urgency of efforts to build a single and sustainable capital market in the European Union.

In 2018, the Commission adopted its first action plan to finance sustainable growth. According to this plan, the EU has set three building blocks for a sustainable financial system 8 . The building blocks are: 1) a classification system, or ‘taxonomy’, of sustainable activities, 2) a reporting system for non-financial and financial companies, and 3) investment tools, including criteria, standards and labels 9.

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The first building block is the 10th Taxonomy of the European Union. The classification code aims to provide a consistent scientific classification system, allowing non-financial and financial companies to share a common definition of sustainability and thus provide protection against greenwashing 11 .

The second building is a mandatory reporting mechanism for non-financial and financial companies that provides investors with information to make sustainable investment decisions. Disclosure requirements include the impact of the company’s activities on the environment and society, as well as the business and financial risks that the company faces due to its sustainable exposure (“dual matter” concept). In this context, the Commission is currently implementing an act delegated under the Regulation on Social Control, which defines the information to be disclosed by financial and non-financial companies regarding their environmental performance in accordance with Regulation 12 of the European Union.

The third building block is a set of investment tools, including criteria, standards and labels. It makes it easier for financial market participants to align their investment strategies with the EU’s climate and environmental goals. They provide more transparency to market participants. This is the aim of the EU’s transitional climate measure and the EU’s benchmark for Paris, created by the 18th EU climate regulation. Today the Commission adopts the legal proposal for the 19th level of green bonds. This proposal would create voluntary quality standards available to all service providers to attract sustainable investment. Furthermore, the extension of the EU Ecolabel to financial products provides retail investors with a credible, trusted and widely recognized label for retail financial products.

In recent years, significant progress has been made in laying the foundations for a sustainable financial system. Three building blocks are underway, but there is still work to be done. The Commission is committed to completing the implementation of the ambitious work plan for 2018. However, since 2018, the understanding of what is needed to achieve the sustainable development goals has changed, and the global environment has changed. For these reasons, a new phase of the EU’s sustainable financial strategy is necessary.

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The strategy identifies four key areas where additional measures are needed to support the financial system to transform the economy towards sustainability.

To inform this strategy, the Commission sought advice from the Sustainable Finance Forum and carried out extensive stakeholder consultations in 2020 20. This strategy also complements other initiatives of the European Green Deal 21, such as the Fit for 55 package 22.

The transition to the EU’s sustainability goals requires unprecedented efforts to mitigate and adapt to climate change, build natural capital and strengthen resilience and broader social capital, all as part of a sustainable recovery from the COVID-19 pandemic. The transition paths of economic actors will be different, with different starting points and business strategies, but all paths must be compatible with the EU’s sustainability goals.

The EU’s efforts are mainly aimed at supporting investment flows for economic activities that are already environmentally friendly and initiatives to make the environment sustainable. A more supportive framework is needed to address the challenge of financing intermediate steps in the transition of key activities towards climate neutrality and the EU’s environmental goals. The Commission requests advice from the Sustainable Finance Forum on options that encourage and identify investments and economic activities for the transition to sustainability 23 .

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Although companies, issuers and investors can use EU regulations to keep their activities and portfolio green, a system can now be developed to better understand the investments of the central centers on the road to sustainability. These investments can reduce negative climate and environmental impacts if they do not lead to the banning of carbon-intensive technologies.

As a first step, the Commission will consider legislative proposals to identify and support the financing of certain economic activities, especially in the energy sector, including gas, which contribute to reducing greenhouse gas emissions by supporting climate change . around the world. the country. the current decade, as announced in the Commission’s communication of April 2021 24.

Furthermore, the Commission will consider options for the extension of the tax system in sustainable environmental activities to be able to identify activities with a medium level of environmental performance. This can help enhance transparency and increase funding for economic activities that are on a credible path towards sustainability, while taking into account the social aspect. At the end of 2021, the Commission will publish a report describing the conditions needed to address economic activities that do not have a significant impact on ecological sustainability and economic activities that are very dangerous for environmental sustainability 25 .


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