The European Green Deal – which is an action plan to halt climate change, promote circular economy and biological diversity and reduce pollution – continues to develop at a rapid pace. A central aspect of the Green Deal is how it should be possible to steer capital towards sustainable investments. An important policy instrument for the financing aspects is the EU's Taxonomy Climate Delegated Act, which will help investors to compare sustainable investments so that public and private capital is steered towards investments that contribute to the achievement of the EU's climate-neutrality goals by 2050 and other environmental objectives that are set out in the Act
The Taxonomy Climate Delegated Act was adopted in 2020, but has yet not come into full effect. This is because requirements specified to enable assessment of which operations are sustainable are established through so-called technical screening criteria. These are adopted by the European Commission through delegating acts. During 2021, the Commission presented technical screening criteria for two of the Taxonomy Climate Delegated Act's six set environmental objectives. In April this year, the Commission's expert group presented a proposal for screening criteria for the four outstanding environmental objectives. These are now available for public scrutiny until 3 May.
The Commission must approve the criteria before they start to apply. As it does not require anything more than the Commission's decision, it is very interesting to monitor the proposals for an indication of what the end results will be like.
WHAT IS ENVIRONMENTALLY SUSTAINABLE ACCORDING TO THE EU'S TAXONOMY CLIMATE DELEGATED ACT?
For an economic activity to be classified as environmentally sustainable according to the taxonomy, it must 1) contribute significantly to one or a number of the taxonomy's six set environmental objectives, 2) not cause damage to any of the other objectives, 3) meet certain minimum requirements within social sustainability and 4) accord with so called technical screening criteria that the European Commission establishes through delegating acts.
The six environmental objectives of the taxonomy are:
- Climate change mitigation.
- Climate change adaptation.
- Sustainable use and protection of water and marine resources.
- Transition to a circular economy, including prevention of waste and increased use of secondary raw material.
- Pollution prevention and control.
- Protection and restoration of biological diversity and healthy ecosystems.
Which specific requirements shall be met (for example, threshold values for emissions levels) are set through the European Commission adopting a delegating act with technical screening criteria. The screening criteria shall provide detailed control of the components under which companies can identify themselves as environmentally sustainable and submit reports. According to the taxonomy, an activity can either be regarded as environmentally sustainable or not.
The Taxonomy Climate Delegated Act and the EU's new Corporate Sustainability Reporting Directive (CSRD), set reporting requirements, compliance with which is monitored by the Swedish Financial Supervisory Authority. According to the Taxonomy Climate Delegated Act, certain large companies must report on the extent to which their operations are environmentally sustainable and when selling financial products they must provide information on how large a proportion of the underlying investment is environmentally sustainable.
In addition, the entry into force of CSRD means that the 2024 financial year will be the first year when sustainability reports have to be presented in accordance with CSRD's standard for large companies of public interest, which have had an average of at least 500 employees during the financial year. See Lindahl's article on CSRD for further information on CSRD entering into force.
WHO IS AFFECTED BY THE SCREENING CRITERIA?
The technical screening criteria affect all companies that are obliged to produce a sustainability report in accordance with the Taxonomy Climate Delegated Act and CSRD, as well as businesses that market green corporate bonds and financial products and/or want to label these products as environmentally sustainable.
Businesses that want to make environmentally sustainable investments or attract green investors are affected indirectly by the screening criteria. Smaller businesses, which are not in themselves directly covered by requirements to publish certain information, have an interest in showing that their operations are environmentally sustainable. This includes remaining attractive as subcontractors to the companies that are covered by the reporting requirement and forthcoming requirements on increased transparency and inspection of supply chains.
Examples of activities which, in order to be considered for financing of sustainability capital must be able to report according to the taxonomy, are, for example, manufacturing industry, water- and waste operations, the construction- and property sector as well as service businesses within the reuse sector. In terms of screening criteria for environmental objectives for biological diversity and ecosystems, it is above all tourism and nature conservation that are affected.
WHAT DO THE COMMISSION'S TECHNICAL SCREENING CRITERIA ENTAIL?
For all environmental objectives, the aim of the technical screening criteria is to establish the conditions under which an economic activity qualifies as significantly contributing to the relevant environmental objective and to determine that the economic activity does not cause significant damage to other environmental objectives. The technical screening criteria are extensive and largely refer to other EU legislation within the areas affected as well as to various ISO standards.
The two environmental objectives that have thus far been covered by delegating acts that have been adopted are climate change mitigation and climate change adaptation. Sectors that these screening criteria affect include the construction and installation industry where requirements have now been set for reuse and recycling of construction and demolition waste.
Below we briefly set out the proposal that the Commission has provided for the four outstanding environmental objectives.
Sustainable use and protection of water and marine resources
For purification of urban waste water to be qualified as sustainable, it requires that discharge to recipients does not risk impairing achievement of the respective objectives for satisfactory ecological status and potential in the Water Framework Directive.
Transition to a circular economy
Businesses that sell spare parts must ensure that the products meet certain specific requirements and also that requirements are placed on the products' packaging. Requirements for the packaging can, for example, be that it shall consist of at least 65 per cent recycled material, approved according to specific certified procedures and that it shall be reuseable.
Prevention and control of pollution
For collection and transport of hazardous waste, it must be guaranteed that hazardous waste is separated at source and collected separately from non-hazardous waste in order to prevent contamination through the waste mixing. The operation shall also ensure that suitable measures are taken to ensure that hazardous waste is not mixed or diluted. Correct collection and handling shall prevent leakage of hazardous waste during collection, transport, storage and delivery. Operators must also meet requirements for record-keeping.
Protection and restoration of biological diversity and ecosystems
Activities that carry out restoration projects with the aim of preserving and/or maintaining habitats and ecosystems, as well as working for the conservation of species shall, besides ensuring the aforementioned, conduct surveys of, for example, existing habitats, a certain area's significance in order to achieve a satisfactory condition for a certain species or of an original ecological relationship.
Assessment of climate risks
An activity cannot be qualified as sustainable if it causes significant damage for any of the six environmental objectives. The Commission has also proposed criteria for this assessment. An activity which, according to these criteria, is in the risk zone must perform a climate risk and vulnerability assessment. This assessment shall take into consideration the economic activity's life span, the expected impact on the climate, as well as, where appropriate, the results from climate projections. An investigation shall also be carried out of which adaptations can be made to the operation to reduce the climate risk identified.
WHAT IS THE NEXT STEP AND HOW CAN COMPANIES PREPARE NOW?
According to regulation that has already been adopted, full reporting pursuant to all of the Taxonomy's criteria shall be underway in 2024. This means that as early as this year, the Commission must decide on screening criteria for the four outstanding environmental objectives.
The technical screening criteria are currently reporting rules and are therefore solely a tool to classify an activity as environmentally sustainable. The reporting rules are in place so that financiers can identify revenues and investments that have the potential to significantly contribute to the environmental objectives. Actors concerned obtain information through the criteria on which information needs to be collected and reported. The information collected then constitutes the basis for classification of the activity's environmental sustainability. Even though today it is largely voluntary to comply with the requirements set through the technical screening criteria, they are an important element in the development towards climate-neutrality by 2050.
The next step is regulation that sets binding requirements on measures and specific handling of products. Activities that already use the technical screening criteria and collect the information required and report on that basis, will obviously have a head start in relation to those who are not already actively engaged in converting their operations to ensure compliance with relevant sustainability goals for the operation. One way to prepare the operation is to collect data and relevant documentation, develop IT tools and systems for processing sustainability data as well as link the documentation with the business's broader ESG strategy.
Lindahl is monitoring the continued development. You are welcome to contact us if you have any questions connected to the Taxonomy Climate Delegated Act and financing of businesses.