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Is my insurance policy really green?

This one of the questions that the European Union’s Green Taxonomy project must answer. Taxonomy is defined as the science of classification. Applied to the economic sector, this implies the development of a means of classifying activities that can be qualified as sustainable. The aims include regulating the market for so-called “green” financial products within the European Union.

Is my insurance policy really green?

Green, sustainable or both?

In order to meet European requirements for combating climate change and reducing carbon emissions by 2050, the European Commission launched an action plan in 2018, entitled “Financing Sustainable Growth”. The measures set out in this plan include establishing a green taxonomy at the European level, i.e. a classification tool providing a common vision of what should be considered “green” or “sustainable” activities.

The European Commission’s group of experts presented its final report on taxonomy in the spring of 2020. The fruit of 20 months of work by more than 200 technical experts, this report defines the framework and environmental objectives of the taxonomy. It will serve as the basis for the future EU regulations on sustainable investment.

Defining “green” activities according to measurable criteria

The taxonomy should enable economic operators and investors to identify activities that can be considered “green” or “sustainable”, thus steering their investment decisions towards environmentally friendly economic activities, and ultimately helping to attain European ambitions in this area. It will also help to avoid any suspicion of “green washing” by ensuring that the information conveyed by distributors of “green” products reflects reality. 

To be considered sustainable, a company’s activities must contribute substantially to at least one of these six priority EU environmental objectives without significantly undermining any of the other five:

1-    climate change mitigation; 
2-    climate change adaptation; 
3-    sustainable use and protection of water and marine resources;
4-    protection and restoration of biodiversity and ecosystems; 
5-    pollution prevention and control;
6-    transition to a circular economy.

The contribution of an economic activity to an environmental objective is measured according to specific performance criteria based on scientific studies. The activity must also be carried out in compliance with minimum social and governance standards. 

In practice, the classification defined by the taxonomy will be a significant aid to the development of financial market operators offering green financial products, because once the taxonomy regulation comes into force in 2022, they will have to publish precise information about any of their investment products qualified as “sustainable” or “green”.

Second objective: enable the introduction of a new European green label

There are currently 8 different labels for sustainable finance, each with its own specific criteria, which makes it difficult for final investors to compare financial products in different Member States, in terms of their environmental and social risks and their sustainable investment objectives. 

The implementation of an EU taxonomy paves the way towards the creation of a single European label for sustainable investment and the establishment of low-carbon benchmarks to improve the comparability of “green” financial products.

 

 

Sources: Les Echos (June 2020) - Headlink Partners (June 2020)

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