The term 'green finance' is often used interchangeably with the 'sustainable finance' and

 

 

 

define neither of them - which causes some confusion (the said regulations provide, however, definitions of how a type of activity can be assessed to be sustainable).

  

Good example for this is Recital 5 of the Taxonomy Regulation.

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Taxonomy Regulation, Recital 5 

In December 2016, the Commission mandated a High-Level Expert Group to develop an overarching and comprehensive Union strategy on sustainable finance. The report of the High-Level Expert Group published on 31 January 2018 calls for the creation of a technically robust classification system at Union level to establish clarity on which activities qualify as ‘green’ or ‘sustainable’, starting with climate change mitigation.

 

It is also true that the term ‘green finance’ is used in a variety of financial frameworks across the world (like green banks, green bonds, green loans, green mortgages etc.) - which led to ‘greenwashing’ concerns.

 
The proposal for an EU Green Bond Standard (GBS) was intended as the answer to this threat.

 

It is argued that terms “green” and “sustainable” have different meanings in different frameworks and may not always describe the same finance:

  • green finance is generally understood to be targeting the positive agenda towards climate and the environment and the term is used in the markets for products, instruments and finance purporting to be focussed on, and/or dedicated to, environmental objectives;
  • sustainable finance often has a wider meaning and inference than green, not only because it can cover social as well as economic and financial sustainability and governance, but because it can also mean identifying finance for both the positive agenda and that which is undermining environmental objectives (Transition finance report of March 2021, Platform on Sustainable Finance, p. 29). 


Investors also differentiate between so-called:

 

 

 

The former are products that promote environmental characteristics (Article 6 of the Taxonomy Regulation and Article 8(4) SFDR) while the latter are the ones that invest in an "economic activity that contributes to an environmental objective" (Article 5 of the Taxonomy Regulation and Article 9(6) SFDR).

 

The said categories are subject to different sets of disclosure rules on the pre-contractual information.


Explanatory Memorandum to Commission Delegated Regulation supplementing Regulation (EU) 2019/2088 of 6 April 2022 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’, specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports adopted by the European Commission reads:

“Financial products that claim to pursue the objective of ‘sustainable investments’, with no significant harm, as defined in Article 2, point (17), of the Sustainable Finance Disclosures Regulation must be accompanied by the disclosures provided for in Article 9 of that Regulation.
Financial products that promote ‘environmental or social characteristics’ – but not necessarily make in part ‘sustainable investments’ with no significant harm – must be accompanied by the disclosures provided for in Article 8 of the Sustainable Finance Disclosures Regulation”.

 

This "green" terminology dominated regulatory debate and sustainable products classifications. Natasha Cazenave, ESMA Executive Director, at the ICI Investment Management Conference on 24 March 2022 (Key priorities for the asset management industry in 2022: sustainable finance and systemic risk, ESMA34-466-282) said:

“One important development we need to recognise is that although SFDR was primarily a transparency regulation, both fund managers and investors are increasingly treating the disclosures categories as product classification.

More and more investment funds market themselves as either Article 8 or Article 9 SFDR - meaning products promoting environmental or social characteristics and products with sustainable investment as their objective.

Out of a sample of 27,000 EU funds representing EUR 10 trillion assets under management, 30% included in their precontractual documentation an SFDR Article 8 or Article 9 statement.

As a consequence, Article 8 products, which are also called “light-green” products in SFDR, have been called out for less ambitious environmental or social characteristics”.

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FAQs, Commission Technical Expert Group on Sustainable Finance

The taxonomy is first and foremost a tool for investors.

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Regulation introduces disclosure requirements, rather than telling investors in what to invest.

There is no obligation to invest only into taxonomy-compliant economic activities.

However, if a financial product is marketed and/or sold to investors as ‘environmentally sustainable’, then the extent to which it is green (the ‘greenness’) must be disclosed to investors by reference to the taxonomy.

This allows for many different investment strategies to co-exist, while avoiding a straightjacket approach.