In focus

How to understand the EU’s growing rulebook on sustainable investing

In the last few years new words have been invading our everyday vocabulary. We have gone from ‘climate change’ and ‘green economy’ to the more specialised ‘sustainability’ and ‘integration’ and the utterly bizarre ‘principal adverse impact’ and ‘taxonomy’. What is happening?

Policymakers have realised that tackling climate change and all its consequences will take a lot of effort. This effort has to open many fronts at the same time and has to change everything we do as consumers, savers and investors. For the world of investment, this effort has resulted in multiple regulatory changes that are complicated and hard to understand.

The purpose of this paper is to explain what is happening in the EU, help people look through the sometimes-strange-sounding terminology, explain who needs to do what, and why all this contributes towards the EU’s ambition to battle climate change.

Why the EU is acting

Climate change is getting harder to ignore. In particular, the economic and social costs are becoming more tangible. The European Environment Agency estimates that the average economic loss from climate-related weather extremes was €12.5 billion a year between 2010 and 2019 and that disasters caused by climate-related extremes accounted for over 81% of the monetary losses caused by natural hazards over the period 1980-2019 in the EU.

After being repeatedly confronted with the real consequences of climate change, governments around the world have agreed to take action both together and individually. The most significant (global) milestone is the Paris Agreement, which is a commitment by individual countries, agreed at COP 21 in Paris in 2015 and entered into force in 2016, to limit the increase in the global average temperature to below 2°C.

The EU has followed this up with an elaborate framework that is its own ‘call to arms’, known as the EU Green Deal. The Green Deal is about setting a goal and the way towards achieving that goal. The goal the EU has set for itself is to have net zero emissions by 2050. It means that, by 2050, the EU will be offsetting any greenhouse emissions it produces.

Figure 1: Key milestones in the EU’s ambition for a more sustainable future


Source: Schroders.

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