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The Brussels Effect on Sustainable Finance

The EU's new sustainable finance taxonomy will go a long way toward strengthening Europe's market for green investment. And, as with the EU's data-protection and environmental regulations, the bloc's framework is likely to have a global impact.

NEW YORK – Europe continues to lead the world in climate action. In the last week alone, the European Parliament and Council reached a provisional agreement enshrining in law the objective of reducing greenhouse-gas emissions by 55% by 2030 and reaching net-zero emissions by 2050. And the European Union published its long-awaited “sustainable finance taxonomy” – a move that could become a global standard for green investment and transform capital markets.

In the last half-decade, public, corporate, and investor awareness of environmental, social, and governance (ESG) risks has risen sharply. ESG investments expanded exponentially during the pandemic, and are now one of the world’s fastest-growing asset classes – a trend that is set to continue.

Likewise, the social, green, and sustainability bond market has boomed in recent years. As figure 1 shows, between 2015 and 2019, worldwide issuance increased more than six-fold; last year, total sustainable bond issuance surpassed $1 trillion.