By Inigo Arruga Oleaga - Adviser, Legal Services, European Central Bank

In Maltese debates about climate change and the environment, like those held at the Sustainable Finance Forum organised in October 2023 by the Malta Financial Services Authority in which I participated, two fundamental questions may emerge. Why talk about green Malta when Malta is an archipelago for which the key point is rather blue than green – the Mediterranean marine environment? Why talk about climate change mitigation when Malta is a very small country whose greenhouse gas emissions are of negligible relevance instead of talking about Malta adapting to climate change?

The answer is that Malta does not need to choose between green or blue, or between climate change (CC) mitigation or adaptation. Of course, like in all choices in economy and finance, resource allocation plays its decisive role, but the EU framework favors the pursuit by Malta of all these public goods.

On the green side, the EU Taxonomy Regulation, the herculean effort to classify economic activities across the EU by their degree of sustainability, adopted on 18 June 2020, considers the preservation and restoration of biodiversity and ecosystems as one of the EU environmental objectives. Similarly, on the blue side, the sustainable use and protection of waters and marine resources is also an EU environmental objective. CC mitigation and adaptation are also EU environmental objectives.

The inclusion under the Taxonomy of these four environmental objectives (biodiversity and ecosystem protection, water and marine resource protection, CC mitigation, CC adaptation) has immediate consequences: Maltese and European economic activities contributing to them are considered sustainable and, therefore, all related investments are considered sustainable investments. The same is true for the other two EU environmental objectives: transition to a circular economy and pollution prevention and control. This setup is directly applicable in all EU Member States.

Three conditions apply for any activity pursuing one of these six objectives to qualify as sustainable: its contribution must be significant (the EU develops criteria for this purpose); it cannot cause significant harm to one of the other five objectives; and it must comply with minimum safeguards of labour rights and governance. In addition, under the Taxonomy, some transitional or enabling activities helping to reach such objectives but not complying with all the above three conditions can also qualify as sustainable. Thus, the EU provides a solid tool for the identification of sustainable investments favouring a greener and bluer EU and Malta and CC mitigation and adaptation.

The question arises however of why this tool has not yet penetrated the EU’s public debate and financial practice with sufficient depth. Or put otherwise, why doesn’t any announced investment or investment proposal, public or private, identify its own degree of sustainability under the Taxonomy?

Four reasons can be advanced. The first one is the voluntary character of the tool: reporting on Taxonomy-alignment of corporate activity is mandatory in the EU for certain companies from January 2023 (financial companies from January 2024), but the active use of the Taxonomy in their business is not. The second reason is the unavoidable staged introduction of the Taxonomy since criteria for Taxonomy-alignment had to be developed.

The third reason is the high ambition of the Taxonomy, which is science-based and all-encompassing, and, therefore, demanding and complex. It is not easy for an activity or an investment to define itself as Taxonomy-aligned. The fourth reason is the acceleration of the pace of the EU on CC and the environment.

Thus, the Taxonomy has yet to assert its presence and effect in the European and Maltese economic and financial life. The European Commission intends to enhance this presence and effect by means of smoothing the usability of the Taxonomy. It has adopted a Communication and a Recommendation for this purpose in 2023. The Recommendation is addressed to the private sector and to the authorities of the Member States, for them to assist with and encourage the provision of transition finance to the economy. In parallel, the EU has adopted the Regulation on European Green Bonds of 22 November 2023. Under the Regulation, the label European Green Bond (EuGB) is reserved for bonds whose proceeds before maturity are allocated to Taxonomy-aligned assets and expenditures.

The drive of the EU to facilitate the performance of the Taxonomy, and the Taxonomy-based character of the EuGBs, offer excellent opportunities for the private sector and the competent authorities in Malta and the other Member States. These authorities can help the economy and financial sector to become greener, bluer and CC oriented, to the benefit of the citizens.

The views expressed in this article are those of the author and do not necessarily reflect those of the European Central Bank.