Towards increased sustainable business activities through a legal framework for sustainable investments?

As part of the EU Commission action plan for financing sustainable growth, the efforts of the EU to link the financing on capital markets with the needs of the real economy and the objectives of the Paris Agreement to reach a climate neutral EU by 2050, Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 was adopted in June 2020.


The Regulation is based on the premise that sustainability and the transition to a safe, climate-neutral, climate-resilient, more resource-efficient and circular economy are crucial to ensuring the long-term competitiveness of the Union economy. In view of the scale of the environmental challenge we are globally facing and the costs associated with inaction or delayed action, the financial system should, according to the European legislator, be gradually adapted in order to support the sustainable functioning of the economy. To that end, the European legislator is of the opinion that sustainable finance needs to become mainstream and consideration needs to be given to the sustainability impact of financial products and services.

Considering that making available financial products which pursue environmentally sustainable objectives is an effective way of channelling private investments into sustainable activities, the Regulation sets requirements for marketing financial products or corporate bonds as environmentally sustainable investments, including regarding the use of labels. These requirements should enhance investor confidence and awareness of the environmental impact of those financial products or corporate bonds. The Regulation does not contain restrictions as to unsustainable business activities themselves, nor does it contain prohibitions or limitations on the externalization by businesses of the environmental costs caused by unsustainable businessactivities.

Taxonomy for sustainable investments

This regulation introduces first of all a classification mechanism for sustainable investments.

Such taxonomy combined with the transparency obligations (see below) is intended to enable investors to verify more easily if and to what extent a certain investment or economic activity is in effect “green” or sustainable and to prevent so-called greenwashing. Quite often businesses indeed use the malpractice of marketing a financial product as environmentally friendly or as sustainable, where in fact it is not.

The Regulation introduces four criteria against which an economic activity should be assed to determine to what extent it can be considered environmentally sustainable. An economic activity is considered environmentally sustainable if:

  1. it contributes substantially to one or more of the six environmental objectives set out in the regulation. The regulation further clarifies what a substantial contribution is and in which cases an investment is considered to be substantially contributing to the six environmental objectives;
  2. it does not significantly harm any of the environmental objectives. It is not further specified in which cases this would be the case;
  3. it is carried out incompliance with the minimum safeguards as determined by the Regulation;
  4. it meets the technical screening criteria still to be established by the European Commission.

The six environmental objectives are the following:

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

Member States must use these criteria to determine if an economic activity can be qualified as environmentally sustainable for the purpose of any measure setting out requirements for financial market participants or issuers in respect of financial products or corporate bonds that are made available as environmentally sustainable.

Disclosure and transparency

The regulation also imposes a set of information and transparency obligations regarding i) financial instruments which invests in an economic activity that contributes to one of the environmental objectives set by the regulation, ii) financial instruments that promote environmental characteristics, iii) other financial instruments and iv) regarding financial reporting.

Furthermore, the Regulation imposes disclosure in the non-financial statements of the proportion of the turnover derived from and expenditures related to sustainable business activities or processes.


The Regulation applies directly in the Member States, without any transposition into national law being needed. It is in force since 12 July 2020, though certain provisions will only enter into force as of 1 January 2022 respectively 1 January 2023. The first company reports and investor disclosures using the EU taxonomy are due at the start of 2022, covering the financial year 2021.

The European Commission must evaluate the application of the Regulation at the latest by 13 July 2022, and after that every three years.

Focus Points

With a view to have an open eye on the future, we follow up on specific (legal) topics at the heart of modern businesses in transition.