EU Taxonomy - Platform on Sustainable Finance consults on draft brown and social taxonomies

On 12 July 2021, the Platform on Sustainable Finance (PSF) published the following draft reports on the brown and social taxonomies for consultation:

• draft report on Taxonomy extension options linked to environmental objectives; and
• draft report on social taxonomy.

The consultations close on 27 August 2021. The PSF will then submit its final reports to the European Commission in autumn 2021. See “Next steps” section below.

PSF draft report on Taxonomy extension options linked to environmental objectives (draft Brown Taxonomy)

The focus is on supporting the net zero transition and the draft report proposes the expected traffic light system with three levels: 

• Significant Contribution; 
• Intermediate Contribution; and 
• Significant Harm.

The PSF recommends that any extension of Significant Harm (SH) activities should be accompanied by an appropriate supporting EU policy framework, including the provision of additional incentive structures and transition finance support.

At present, the existing Taxonomy only allows for activities that provide a “significant contribution” to environmental objectives whilst also doing “no significant harm” to the other objectives and the minimum safeguards. The PSF has said that there is a “high risk of misinterpretation and misunderstanding” of this "intermediate performance" space between significant contribution and harm.

So the draft report makes the case for a category of “Intermediate Transitions” to improve performance away from SH, although not yet reaching Green performance for a given activity - for example for the production of electricity from gas (not exclusive to natural gas) and for the transition of existing natural gas facilities. See page 30 for the detailed transition pathway considered by the PSF.

The key PSF recommendations for consultation are as follows:

1. Extending the Taxonomy, with a priority given to an extension towards activities causing SH. An extended taxonomy will allow a wider coverage and recognition of activities with different performance levels, including intermediate and no-significant impact (NSI) activities. Further, it would help to provide a positive label for investments to move activities out of significant harmful performance. This should be done in stages, building on the existing Taxonomy Regulation, and accompanied by an appropriate supporting transition policy framework.
2. The extended Taxonomy must be part of a wider set of EU policy and legislative initiatives aimed at incentivising finance for urgent transition away from SH activities.
3. The PSF stresses that the current Taxonomy framework already defines three levels of environmental performance and that failing the Do No Significant Harm (DNSH) criteria is technically equivalent to causing SH.
4. Identifying further economic activities for which no technological possibility of improving their environmental performance to avoid SH exists with respect to all six environmental objectives, as is the case for the power generation activity using solid fossil fuels already identified in Article 19(3) of the Taxonomy Regulation.
5. Considering jointly as significantly harming environmental objectives from a technical point of view the economic activities failing DNSH criteria and those for which no technological possibility of improving their environmental performance exists.
6. Naming as “Intermediate Performance” the middle level of environmental performance (between SH and SC) of economic activities. The PSF is against creating any further sub-divisions of performance levels.
7. Once a decision on an extended SH taxonomy has been made, phasing in should be rapid – aiming for first reporting by 2023. The necessary work to identify activities for which no technological possibility of improving their environmental performance to avoid SH exists referencing all six objectives should start ASAP.
8. Making a technical assessment regarding the formulation of DNSH criteria in Delegated Acts for supporting the interpretation of the three performance levels embedded in the current Taxonomy framework.
9. Identifying an additional type of transition for activities moving out of SH performance that do not meet the criteria for SC to be called “Intermediate Transitions” with “intermediate transition investments” (capex) as a reporting KPI for financial products. The PSF highlights that these are not SC, or green activities, but that identification of this type of transition will improve clarity and understanding in the transition finance market. The Commission should issue non-binding guidance to corporates, financial market participants (FMPs) and other Taxonomy users on the use of SH and intermediate performance levels for informing activity-specific investment plans and transition narratives.
10. Developing technical screening criteria for potential “decommissioning/closure of…” SH activities.
11. Establishing a no significant impact (NSI) taxonomy by pro-actively identifying activities that are characterised by a high likelihood of not being covered by the existing green taxonomy for substantial contribution nor by a significant harm taxonomy extension, excluding climate change adaptation objectives.
12. The Commission should carry out an in-depth materiality analysis at NACE-4 level to identify all activities not yet covered or not planned to be covered by Delegated Acts as a basis for developing a list of NSI activities.
13. Creating a reporting requirement for companies to participate in a labelling/certification process (such as EMAS) that ensures minimum environmental performance as a prerequisite to reporting NSI activities.
14. Issuing on the existing Taxonomy to make it clear that "green" capital expenditure and related operational expenses made by enterprises operating in NSI activities could clearly qualify for green finance.
15. Amending the Taxonomy Regulation to provide a straightforward definition of the NSI concept and NSI activities.

PSF draft report for consultation on a social taxonomy

The social taxonomy is intended to identify projects that deliver a “substantial contribution” and “significant harm” to social objectives, mirroring the approach of the existing ‘green’ Taxonomy.

The PSF anchors the need for a social taxonomy in the context of EU goals (Sustainable Development Goals, EU Social Charter, European Pillar of Social Rights, social internal market as per the TEU) and global goals (UN Guiding Principles on Business and Human Rights).

Criteria would be based on international authoritative standards, and should be linked to economic entities rather than activities.

The PSF suggests that the social taxonomy should be structured both vertically (activities making relevant products and services accessible while doing no harm to other social objectives) and horizontally (corporate governance, impacts on different groups of stakeholders affected by economic activities, taxation, bribery, lobbying).

It intends to distinguish activities that are inherently socially beneficial (job creation) and those with added social benefits (ensuring decent jobs), and to include minimum environmental safeguards.

The PSF has proposed three major social objectives, as well as some sub-objectives related to corporate governance.

Vertical (activities-based) objectives

1: Improving accessibility of products and services for basic human needs such as:

• Water, including waste water management
• Food
• Housing
• Healthcare, including care work
• Education (including vocational training).

2: Improving accessibility to basic economic infrastructure, including (examples, not exhaustive):

• Transport
• Telecommunications and internet
• Clean electricity
• Financial inclusion
• Waste management.

Horizontal (products and processes-based) objectives

3: Promoting positive impacts and avoiding and addressing negative impacts on affected stakeholder groups:

• Ensuring decent work
• Promoting consumer interests
• Enabling inclusive and sustainable communities.

Governance

• Good sustainable corporate governance
• Transparent and non-aggressive tax planning

The criteria to emerge from these objectives are more likely to be focused on providing a "substantial contribution" through activities-based projects and ensuring they "do no significant harm" for the products and processes-based projects.

Next steps

• 27 August 2021: Consultation on the draft reports closes
• September 2021: PSF to work on the feedback to the consultations
• October-November 2021: PSF to deliver to the Commission final reports and outline of social taxonomy and minimum safeguards
• By 31 December 2021: Commission to publish report under Article 26(2) of the Taxonomy Regulation on the extension of the scope to cover: (1) economic activities that do not have a significant impact on environmental sustainability and economic activities that significantly harm environmental sustainability; and (2) other sustainability objectives, such as social objectives.
• 2022: Work to implement the extension of the Taxonomy