European institutions have taken a step closer to agreeing definitions of what constitutes green business activity.

The end of last week saw the commission president and the European Parliament reach agreement on a “taxonomy” of sustainable economic activity, following a year of negotiations. The taxonomy still needs to be ratified by the Commission and the Parliament, but it looks like European regulators have settled a way of defining sustainable business activity for investors and lenders.

Commission president Valdis Dombrovskis tweeted: “A major success ahead of COP25 and for our sustainable finance strategy.”

The sustainable business taxonomy forms the core of the EU’s strategy to green financial activity across Europe to ensure it supports the fight against climate change.

However, not everyone is happy with the outcome. EuropeanIssuers, a body representing quoted companies across Europe, believes the final agreement includes regulatory measures that place new, unjustified burdens on companies. These include extension of the regulation to include an obligation for companies to report details of their turnover, CapEx and OpEx associated with environmentally friendly economic activity.

EuropeanIssuers disagrees that these new reporting demands will help investors. It believes there is little evidence that reporting these figures is relevant to investors’ need to comply with their own disclosure requirements on ESG (environmental, social and governance) factors.

“These reporting requirements were put forward by the Commission at a very late stage of the trialogue negotiations without any impact assessment,” said a statement from EuropeanIssuers.

“They will impose unjustified additional burdens for companies without guarantee that they will be useful and will put European corporates in competitive disadvantage vis-à-vis non-European competitors.”

Indeed EuropeanIssuers has called for a new dialogue to define new reporting requirements.

Defining products

The taxonomy is designed to be used by investors and forms a central plank of the EU’s sustainable finance strategy.
When offering green funds investors must report on how they’ve used the taxonomy to define their products.

The taxonomy has been a much anticipated part of the financial landscape given given widespread disparities on how fund managers define what is and isn’t sustainable or ESG-friendly.

The taxonomy has, in the past, provoked a mixed reaction. Will Martindale, director of policy and research at campaign group Principles for Responsible Investment, told investors at a Paris conference in October that it formed a welcome addition to the investment landscape even though it was “complex, but designed to deal with complexity”.

However, others have expressed clear doubts. The sceptics say the taxonomy could be too “strict”, its definitions too narrow, and therefore inhibit green investment.