Today, the EU Platform on Sustainable Finance published its advice on the ’extended taxonomy’. It builds on the green taxonomy, which classifies which economic activities can be considered sustainable (“green”). Most of the economy is not yet sustainable and needs to transition.

Adding a transition (“amber”) and harmful (“red”) category, the extended taxonomy will provide a framework for investors to identify areas for urgent action in their portfolios and boost transition finance.

Maria van der Heide, Head of EU Policy at ShareAction said: “It is crucially important for investors to know which proportion of their portfolio is not or not yet green, as this is where the urgent action is required. They can then either engage with companies to incentivise them to transition or to steer investments away from those activities that cannot transition. The IPCC is clear: we need urgent and expansive action to transition our economy to net zero. The Commission should respond to the report swiftly and develop an extended taxonomy without delay so that investors can act accordingly.”

The extended taxonomy will cover up to 100 per cent of the EU economy and of financial portfolios compared to the current green taxonomy, which currently only covers up to 5 per cent of EU market activities.

Where activity cannot reach the level of ambition of the green taxonomy immediately, the amber category will allow institutions to steer urgent investments toward transition finance.

It also allows investors to understand where they should target engagement and escalation to incentivise companies to take action on climate.

The European Commission will review the recommendation and decide whether to go ahead with the project later this year.

Alexander Burr, ESG Policy Lead at Legal and General Investment Management said: “The Platform’s extended taxonomy is another excellent demonstration to policymakers around the world of how they can create a robust package of Sustainable Finance regulation that will accelerate the transition to net-zero. Crucially, including a transition or ‘amber’ category will provide robust definitions on what activities are truly 'green’ and those that should be classified as 'transitioning'. The report also reinforces the need for corporates, not just in the EU, to develop credible net-zero transition plans and reporting capabilities.”