Michael McGrath (Cork South Central, Fianna Fail)
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The EU taxonomy for sustainable activities being developed at present is a harmonised classification system for environmentally sustainable economic activities. The Taxonomy has a significant role in supporting the mobilisation of capital towards sustainable investments through providing common definitions to companies, investors and policymakers on what constitutes an environmentally sustainable economic activity. Large companies and financial services providers report on their portfolios’ alignment with the Taxonomy.

This Taxonomy is based on six EU environmental objectives. For an economic activity to be considered Taxonomy-aligned, it must make a substantial contribution to at least one of these objectives, and do no significant harm to the others, in addition to complying with regulatory technical standards and minimum safeguards. The objectives are:

• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy, waste prevention and recycling
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

The reporting mandated by European laws such as the Sustainable Finance Disclosures Regulation and the Corporate Sustainability Reporting Directive include descriptions of plans and actions to ensure that a company’s business models and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement, including absolute greenhouse gas emission reduction targets for 2030 and 2050.

In addition, the European Green Bond regulation sets out the requirements that a bond must meet in order to be considered green, namely Taxonomy alignment with transparency and supervision provisions. The Corporate Sustainability Due Diligence Directive had its general approach agreed in December 2022. The proposal aims to establish a system within company law and corporate governance to address adverse human rights and environmental impacts arising from companies' own operations, their subsidiaries' operations and their supply and value chain activities.

Other legislation with climate elements that companies and financial institutions may need to take into consideration include; the Environmental Social and Governance (ESG) Risk Disclosure Standards, the Benchmark Regulation, as well as elements within the Capital Requirements Directive (CRD IV), the Capital Requirements Regulation (CRR), and Solvency II.

All of these inter-linked sustainability legislation provisions have been developed and agreed in recent years. The overall framework is comprehensive and requires significant efforts by companies, including those in the banking and financial services sector, as well as by EU Governments - which must report against the "do no significant harm" elements of the taxonomy for the recovery and resilience plans amongst others.

Its effect on investment is primarily by encouraging investors and consumers to make more sustainable decisions through science-based definitions of sustainability and with transparent reporting and disclosures of sustainability impacts and risks.