A proposed new European Union green classification system would help investors and companies identify and make environmentally friendly decisions and may evolve over time to include rules for social and governance-related investments, experts explain on the latest episode of ESG Insider, an S&P Global podcast.

The taxonomy, which the European Commission released for comment in June, "sits at the heart of the EU's action plan on sustainable finance and it's really the essential definition by which we can all judge whether something is green and sustainable or not," said Richard Mattison, CEO of Trucost, which is part of S&P Global Market Intelligence.

Mattison, who worked with the EU to craft the recommendations for the taxonomy, also outlined ways companies and investors are likely to apply the rules. And he indicated the policy may be refined and expanded over time to cover a more comprehensive list of social and governance issues such as gender diversity and forced labor.

Also in the episode, we talked to Sean Kidney, CEO of the Climate Bonds Initiative, which has its own taxonomy for green bonds. Kidney said the EU's classification system could open up the green bond market to a whole new set of issuers.

The EU taxonomy has broader implications too, according to June Choi, a research analyst at the Climate Policy Initiative.

"The fact that the EU is taking such a high-level action on climate change sends a very important policy signal, not just for sustainable investors, but to the society in general, because it shows ... a certain level of political resolve to tackle climate change," Choi said.

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(Photo: AP)