What Makes an Investment ‘Green’? The EU Wants an Answer

DNSH:That’s Europe’s latest environmental mandate, short for Do No Significant Harm, and it underpins a new approach to assessing “green” business credentials.

Billions of investment dollars are flowing into projects that tout themselves as “sustainable finance,” covering everything from wind farms to housing, vehicles and factories. But who decides what’s sustainable? It’s a question the European Union is tackling with a raft of legislation and regulations now rolling out, which could shape international finance for years to come.

The EU recently began requiring all fund managers that raise money in the 27-country bloc and claim a socially conscious aspect in their offerings to disclose exactly how they address environmental, social or governance considerations, known as ESG. Topics include board gender diversity and greenhouse-gas emissions. The rules, known as the Sustainable Finance Disclosure Regulation, apply to money managers doing business in the EU, no matter where they are based. Analysts predict a ripple effect similar to the EU’s 2016 General Data Protection Regulation, or GDPR, which has forced disclosure changes at companies from Silicon Valley to Shanghai.

Next, the EU plans to update rules from 2014 governing reporting by all companies—not just financial ones—on nonfinancial ESG issues, including human rights, bribery and corruption. A draft of the Non-Financial Reporting Directive is due out soon, now likely also to cover issues including gender equity, sustainability efforts, and avoiding suppliers who use slave labor.

With all these looming reporting requirements on topics that aren’t easily quantified, EU experts from industry, government, NGOs and other fields are striving to develop methods to measure sustainability, branded as the Green Taxonomy.