As the world shifts closer to key climate change deadlines, there is increasingly greater focus on the role of sustainable investment in the global climate plan. To arrest the trend of climate change and avert potential disaster, unlocking and directing funding towards sustainable projects is key.
However, given the risk of directing scarce resources towards “greenwashed” projects — projects that claim to be sustainable when they’re not — it has become just as important to lay down rules for what projects can be considered green and how to verify their sustainability credentials.
Some regions, such as the EU, have taken steps to clarify what investments qualify as sustainable. Many organizations also have internal criteria to determine what projects meet green standards. I take a brief look at these criteria as they apply in the EU and elsewhere.
The EU framework on sustainable finance
Beginning in 2017, the EU began to take a closer look at what investments can be considered sustainable. In that year, the European Commission organized a public hearing to deliberate on sustainable finance and its applicable metrics.
In 2019, the European Parliament and Council reached a provisional agreement on a framework to guide what activities are sustainable. While aspects of the framework are still under development, the EU’s efforts have resulted in the development of several rules, including the EU taxonomy for sustainable activities and guidelines for corporate disclosure of climate-related information.
The rules generally classify sustainability investments into three categories i.e. those that:
- Substantially contribute to green goals
- Enable other green activities; or
- Assist the transition to green objectives
The rules also answer the question of what these green goals or objectives are. According to the EU taxonomy, any investment that contributes to the following objectives is considered environmentally sustainable:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
In addition, qualifying investments must abide by the “do no harm” principle, meaning if they meet one objective they should not significantly harm any of the others. They also should respect labor and human rights and should not cause more harm than benefit to the environment.
Other organizational criteria for green investing
Outside the EU, private organizations specify their own criteria for what investments are seen as sustainable. They follow many strategies such as:
- Negative or exclusionary screening, which excludes projects in specific industries or sectors based on ESG standards; and
- Positive or best in class screening, which targets investments in sectors or projects that exhibit positive ESG performance.
Additionally, investors may pursue other strategies such as activist investing — investing in a company in order to make it more sustainable — or investing in a manner targeted at solving specific environmental or social problems, called impact investing.
Conclusion — Are the sustainability standards sufficient?
In my opinion, laying down clear rules for identifying green investments is a good step, especially when it helps prevent diversion of critical funds to greenwashed projects. However, rules such as those set in place by the EU are not without controversy, especially considering the always-evolving nature of the sustainability discourse and complex questions regarding the roles of gas and nuclear power.
Ultimately, while guidelines are important, I think there should be a recognition that they cannot be set in stone — there should be encouragement for open and continuing engagement to refine the rules as needed.
