"Sustainability" and "ESG"

What do they mean in the context of sustainable finance?

More generally, according to the EU, "sustainable finance" refers to the process of integrating environmental, social and governance (ESG) issues into investment decisions in the financial sector, leading to more long-term investment in sustainable economic activities and projects (Source). This means that the EU is also following the so-called ESG structure in formulating the requirements under the Action Plan on Financing Sustainable. Sustainability is assessed on the basis of three dimensions.

The EU taxonomy: a classification system for sustainable activities

With the EU taxonomy, the EU has developed a classification system for sustainable activities that can be broken down into just these three dimensions. The system formulates technical requirements to classify economic activities - mainly in the "E" area. So far, only minimum requirements have been defined for "S" and "G".

The following six environmental objectives provide the substantive basis for the EU taxonomy:

  1. Climate Change Mitigation
  2. Climate Change Adaptation
  3. Sustainable Use and Protection of Water and Marine Resources
  4. Transition to a Circular Economy
  5. Pollution Prevention and Control
  6. Protection and Restoration of Biodiversity and Ecosystems

To be considered environmentally sustainable under the taxonomy system, economic activities must make a substantial contribution to one of these six environmental objectives. At the same time, they must not have significant adverse effects on the other five environmental goals. In the system, this is called the "do no significant harm" (DNSH) principle. Technical evaluation criteria are developed for all six environmental objectives, which can be used to assess the specific activities in terms of their environmental sustainability.

With the economic activities covered by the taxonomy, priority was given to sectors responsible for 93.5 percent of all direct greenhouse gas emissions in the EU. Evaluation criteria have already been defined for these activities in order to make a significant contribution to the environmental goals of "Climate Change Mitigation", "Climate Change Adaptation" and "Transition to a circular economy". The respective DNSH evaluation criteria for the other environmental objectives were also established. The rule is that the entire set of requirements must be met in order for the economic activity to be classified as taxonomy-aligned. In June 2023, the final screening criteria for the remaining four environmental objectives were published.

Please note: In equating the EU Taxonomy Regulation and Sustainable Finance Disclosure Regulation with existing or new ESG ratings, caution is advised. As of June 2023, there are currently various providers of ESG rating systems on the market with different scales, metrics and application areas. A uniform standard does not exist and comparability is only possible based on a detailed analysis. On European level, the regulation of ESG reporting standards is planned.



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Seema Issar

Manager Buildings In Use / Sustainable Finance