EU: Platform on Sustainable Finance publishes final recommendations on TSC for remaining four environmental objectives in Taxonomy

On 30 March 2022, the Platform on Sustainable Finance (PSF) published its final recommendations to the European Commission on the technical screening criteria (TSC) for the four remaining environmental objectives in the Taxonomy Regulation. Sometimes also referred to as "Taxo 4" or "Taxo4". 

The remaining four environmental objectives are as follows:

• sustainable use and protection of water and marine resources;
• transition to a circular economy;
• pollution, prevention and control; and
• protection and restoration of biodiversity and ecosystem.

In order for a particular economic activity to be classified as “environmentally sustainable” under the EU Taxonomy, it must make a substantial contribution to at least one of the environmental objectives without doing significant harm to any of the other environmental objectives. The activity must also meet certain minimum social safeguards listed in the Taxonomy Regulation (see our previous blog post).

The PSF’s recommendations are divided into:

• Part A – which explains the rationale and methodology to the TSCs, as well as what further work the PSF is doing on the Taxonomy; and
• Part B – containing the detail of the TSCs.

In order to understand the detailed TSCs for each of the activities covered in Part B, it is helpful to first understand the “headline ambition level” (i.e. aspirational goal) for each of the remaining four environmental objectives. This is set out in Section 4 of Part A. So, for example, the headline ambition level for the water objective is: to ensure at least good status for all water bodies by 2027, and good environmental status for marine waters as soon as possible, and to prevent the deterioration of bodies of water that already have good status or marine waters that are already in good environmental status.

The current recommendations relate to a list of priority activities. The PSF is still working on the TSCs for a number of other activities (such as forestry x biodiversity, agriculture x biodiversity, waterborne transportation x pollution, manufacturing of chemical products x pollution, bioenergy x biodiversity, land transportation x pollution, and enabling activities) and plans to publish those TSCs in May as a supplement to the current report.

The PSF has also been looking at other activities and TSCs that have proven to be particularly challenging and where evidence is lacking, or where the approach to delivering a substantial contribution is not yet clear (e.g. land-based mining and quarrying, other than coal, lignite, crude oil/petroleum or natural). The PSF has said it is not currently doing further work on those activities but that they are being considered for future work by the PSF.

Part A also includes a number of other recommendations for improving the Taxonomy as a whole, including review of the existing do no significant harm (DNSH) criteria in the Climate Delegated Act, and the development of guidance on the use of adaptation criteria (see Section 7). The PSF has also recommended that the Commission consider further development of activities that are “measures” that may support or enable the economic activities already covered and for new priority activities beyond those that are already included in the existing Delegated Acts. The PSF uses the example of “measures” such as building renovation energy efficiency components and electric vehicles in company fleets, which it believes are vital for the green transition and green debt market. It notes that the inclusion of fundable measures within the Taxonomy would allow access to green finance from a wider range of sectors (rather than limiting the Taxonomy to just full activity criteria). 

The Commission will now need to decide what to do with the PSF’s recommendations and publish a Delegated Act, before the end of the year, with the TSC for the remaining four environmental objectives. Although the PSF recommendations are not binding on the Commission, they carry significant weight.

Meanwhile, the Complementary Delegated Act with the climate TSC for nuclear and natural gas (see our previous blog post) is being formally scrutinised by the European Parliament and Council. That process (which started on 10 March) will run for four months but can be extended by a further two months if the Parliament or Council request it. The Parliament and Council do not have the power to amend the Delegated Act – they either have to veto or approve it as is. It remains to be seen whether either institution can muster enough votes to veto the Delegated Act. A number of Members of the European Parliament have written to the Commission asking for the Delegated Act to be withdrawn, as they believe the treatment of natural gas is no longer appropriate in light of the EU’s plans to reduce its reliance on Russian gas. However, based on the Commission’s recent replies to questions from MEPs, it would appear that the Commission is not willing to withdraw the Delegated Act (at least not yet).