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Climate change: New rules agreed to determine which investments are green

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Parliament negotiators reached an agreement with Council on Monday on new criteria to determine whether an economic activity is environmentally sustainable.

The so-called “taxonomy regulation” stipulates that the following environmental objectives should be considered when evaluating how sustainable an economic activity is:

  • climate change mitigation and adaptation;
  • sustainable use and protection of water and marine resources;
  • transition to a circular economy, including waste prevention and increasing the uptake of secondary raw materials;
  • pollution prevention and control; and
  • protection and restoration of biodiversity and ecosystems.

“The taxonomy for sustainable investment is probably the most important development for finance since accounting. It will be a game changer in the fight against climate change”, said lead negotiator for the Environment Committee, Sirpa Pietikainen (EPP, FI). “I am satisfied that we reached a balanced agreement with Council, but this is only the beginning. Greening the financial sector is a first step to make investments flow in the right direction, so it serves the transition to a carbon neutral economy”, she added.

“All financial products which claim to be sustainable will have to prove it following strict and ambitious EU criteria. The compromise also includes a clear mandate for the Commission to start working on defining environmentally harmful activities at a later stage. Phasing out those activities and investments is indeed as important to achieve climate-neutrality as supporting decarbonised activities”, said Economic Affairs Committee rapporteur Bas Eickhout (Greens/EFA, NL).

How it works

An economic activity should contribute towards one or more of the above objectives and not significantly harm any of them, says the agreement. Its environmental sustainability should be measured using a unified classification system, as national labels based on different criteria make it difficult for investors to compare green investment, thus discouraging them from investing across borders.

The text does not preclude or blacklist any specific technologies or sectors from green activities, apart from solid fossil fuels, such as coal or lignite. Gas, and nuclear energy production are not explicitly excluded from the regulation, however. These activities can potentially be labelled as an enabling or transitional activity in full respect of the “do not significant harm” principle.

The new legislation should also protect investors from risks of ‘greenwashing’ as it makes it compulsory to provide a detailed description of how the investment meets the environmental objectives.

Transition and enabling activities

The taxonomy criteria should also ensure that transition activities necessary to become a climate-neutral economy, but which are themselves incompatible with climate neutrality, should have greenhouse gas emissions levels corresponding to the best performance in the sector or industry. Transition activities should neither hamper the development of low-carbon activities nor contribute to carbon intensive lock-in effects, says the text.

A similar rule will apply to activities that directly enable a sector to improve its environmental performance (such as manufacturing wind turbines for electricity production).

Next steps

The agreement reached by the EP negotiating team will have to be approved first by the two committees involved and by a plenary vote. The Commission will regularly update the technical screening criteria for the transition and enabling activities. By 31 December 2021, it should review the screening criteria and define criteria for when an activity has a significant negative impact on sustainability.

Background

The Taxonomy regulation should enable investors to identify environmentally sustainable economic activities that substantially contribute to climate change mitigation, based on scientific evidence, including evidence from existing life cycle assessments (production, use, end of life and recycling), environmental impacts and long-term risks.

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‘New dawn’ for Europe as War in Ukraine Strengthens EU and Support for Enlargement

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The European Union surprised the world, and even itself, with the speed, scale and unity of its response to Russia’s invasion of Ukraine. This “new” Europe is ready to project both soft and hard power on the world stage, European leaders told participants at the World Economic Forum Annual Meeting 2022.

Christine Lagarde, President, European Central Bank, on the panel at the session, European Unity in a Disordered World?, said the Ukraine war has revealed how powerful Europe is collectively: “This is a new dawn for Europe.”

The war on Ukraine has also revealed weaknesses – including global supply chain vulnerabilities and over-reliance on Russian energy, she said, but Europe is addressing this and can begin to flex its muscles on the global stage. “Europe has untapped purchasing power, trading power, technology power, pension power and moral power.”

Roberta Metsola, President of the European Parliament, reinforced the point. “This is Europe’s moment,” she said. “Europe can become the global project for peace.”

Mistakes of the past will be rectified, she said. “For way too long we did not seriously consider an energy union where we can rely on each other rather than on a country that can switch us off at any time.”

Referring to the EU’s support and defence of Ukraine, she was emphatic: “This is not the time to talk about face-saving for Russia or appeasement.”

Eduard Heger, Prime Minister of Slovakia, also on the panel, said: “If Ukraine falls to Russian aggression, Slovakia is next.” He added that we must continue to provide military support as well as step up humanitarian aid. “Above all we need to give Ukrainians hope.”

“Let’s not compromise – we must remain faithful to the values of the EU – freedom, rule of law, human dignity and equal rights.”

Micheál Martin, Taoiseach of Ireland, said of Russia’s invasion of Ukraine: “The people of Europe have spoken. Enough is enough.” In response there is much stronger unanimity between member states and more support than ever to accept the accession of new members.

He continued: “We see the EU’s future in terms of the green economy and in terms of the digitalization but also in terms of enlargement.”

Mark Rutte, Prime Minister of the Netherlands, called on European member states to continue to raise their defence spending. “The NATO alliance members are inseparable, but Europe must play its part,” he said. “This will help transform Europe from a soft power to a hard power.”

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Geopolitical Crises Forcing Leaders to Face up to Difficult New Realities

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Poland’s President Andrzej Duda delivered a harsh rebuke to Russia over its invasion of Ukraine, pledging “100% support” for President Volodymyr Zelenskyy and calling for Moscow to pay reparations to Kyiv. “I simply cannot accept that Russia can violate international law with impunity.”

Russian aggression against Ukraine has revived unity within the West and highlighted for many Western nations the importance of democratic values. Finland and Sweden, notably, have set aside their longstanding policies of neutrality and applied to join NATO. “We are in a totally new situation and have to wake up to that,” said Pekka Haavisto, Finland’s Minister for Foreign Affairs, noting that the collapse of the post-war European security architecture, as well as Russia’s increased appetite for risk, were among the major factors prompting Finland to apply for membership.

Haavisto said that in this “grey time” between the Nordic country’s application to join the alliance and its potential full accession, when it will enjoy mutual security protection under Article 5 of the NATO charter, NATO members have given Finland and Sweden assurances that they will guarantee security. Asked about Turkey’s stated objection to extension of membership to Finland and Sweden, he expressed confidence that Helsinki can address concerns.

Alarmed by an increasingly competitive geopolitical landscape marked by mounting frictions between the United States and China, Prince Faisal bin Farhan Al Saud, Minister of Foreign Affairs of Saudi Arabia, emphasized the need for cooperation.

“If we learned anything from COVID, it is that we need to focus on cooperation and I think we need to continue to look towards avenues to foster that cooperation. Even when there is difference, when there’s competition, we need to find mechanisms to talk to each other.” He noted that Saudi Arabia, which values both its extensive trade relationship with China and its national security relationship with the US, is well-positioned to facilitate dialogue between the world’s leading powers.

Prince Faisal’s remarks were echoed by Pakistan’s Minister for Foreign Affairs, Hina Rabbani Khar, who commented on the “binary choice” that countries with close ties to both China and the US are increasingly asked to make. “We are typically asked this question all the time: Who do you choose? It shows how far we have fallen as a global community,” she said. This is particularly difficult, she noted, for a country like Pakistan, which is already in fiscal crisis and now faces “the superimposition of a food security crisis”.

Gregory W. Meeks, Democratic Congressman from New York’s 6th District and Chairman of the House Committee on Foreign, praised the bipartisan support for a recent Senate bill pledging $40 billion in humanitarian and military aid to Ukraine, as well as the broad international support that Ukraine has received.

He also focused on the potential food crisis, emphasizing the need to break the blockade of Ukraine’s Black Sea ports so Ukrainian grain can be delivered to the many countries that depend on it. “You got to open [the port of Odessa] up because that’s not been just limited to what’s happening in Ukraine; this threatens the entire world.”

Madrid is host to next month’s NATO summit and Spain’s Foreign Minister, José Manuel Albares Bueno, praised the alliance’s response to Russian aggression in Ukraine. But he emphasized the threat that the looming food crisis, if left unresolved, could pose to Europe. Noting that the Sahel – the region of North Africa bordering the Sahara – is not only already deeply food-insecure, he warned that rising cereal prices could set off a potentially destabilizing northward migration. “Unity is our best defence.”

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WEF calls for new partnerships to generate private capital for fragile communities

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The World Economic Forum released today a paper that calls for new collaboration between humanitarian and development organizations, businesses, investors and entrepreneurs to make a difference to the lives of the nearly 1 billion people living in fragile and conflict-affected settings worldwide.
 
Cultivating Investment Opportunities in Fragile Contexts: Catalysing Market-Driven Solutions to Strengthen Community and Economy Resilience outlines a practical approach to how organizations can build the capacity and strategic thinking needed to develop a sustainable business case for solutions that have the potential to unlock new sources of finance to reach impact at scale.
 
“It takes more than a single intervention to unleash transformational change in complex ecosystems. To truly leverage the potential for positive and sustainable social impact while meeting investor demand for returns, new ways of collaboration across sectors are needed,” said Børge Brende, President of the World Economic Forum.
 
The IKEA foundation is a partner of this initiative. Over the next three years the partnership will develop innovative business models and investments that strengthen local economies and increase the self-reliance and resilience of the most vulnerable communities and economies.
 
“We support the World Economic Forum because of our mutual goal to improve the lives of people who are affected by crises, including those who are forced to flee,” said IKEA Foundation CEO Per Heggenes. “We believe that together we can help attract the investment needed to strengthen fragile communities and empower the people who live in them to rebuild their lives and create a better future for children and their families.”
 
The joint discussion paper is an evolution of the work initiated by the Forum’s Humanitarian and Resilience Investing (HRI) Initiative, which was launched at the World Economic Forum Annual Meeting 2019 in Davos-Klosters, Switzerland.
 
As a first step, the initiative will operationalize the Organizational Readiness Playbook launched in 2020, and bring together a cohort of pioneers from humanitarian and development organizations, donor governments and development finance institutions to increase organizational capacity for HRI.
 
The initiative will also support investment opportunities targeting HRI to meet investor criteria and attract the commercial capital needed to reach scale. It will further facilitate the development of new tools, research and resources, including the standards, common terminology and analytic frameworks that allow for systems-level impact measurement.

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