EU: Platform on Sustainable Finance publishes supplementary report on TSC for other four environmental objectives under Taxonomy Regulation

Background 

The Platform on Sustainable Finance (PSF) is advising the European Commission on the technical screening criteria (TSC) for the remaining four environmental objectives under the Taxonomy Regulation: 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. Sometimes also referred to as "Taxo 4" or "Taxo4".

In March 2022, the PSF published a report with its recommendations for those TSC but said that those recommendations related to a list of priority activities and that the PSF was still working on the TSCs for a number of other activities (such as forestry, waterborne transportation, manufacturing of chemical products, bioenergy, land transportation, and enabling activities) and that it planned to publish those TSCs in May as a supplement to the March report (see our previous blog post). The PSF also said that it had 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).

The supplementary PSF report 

The PSF has now published that supplementary report, which is 382 pages long and is highly technical.

The report is divided into two parts:

• Part A – Methodology and Recommendations – work update since March 2022; framework methodology to describe ‘enabling activities’; recommendations to the Commission on its further work on the Taxonomy; and an annex with dissenting views on forestry and logging TSC for biodiversity
• Part B – Technical Screening Criteria – this is additional TSC that have been developed in the past seven months for a number of activities (detailed below)

The report covers the following - some are new, and some are revised/updated, criteria and categories:

• An additional activity option for agriculture for biodiversity
• Forestry activity for biodiversity (see below)
• Manufacturing of basic pharmaceutical products and pharmaceutical preparations
• Manufacturing of chemical products
• Waterborne Transportation
• Manufacture of chemicals
• Manufacture of plastic packing goods
• Various enabling activities (see below)
• Hotels, holiday, camping grounds and similar accommodation (tourism)
• Desalination activity
• Use of concrete in civil engineering works
• Demolition of buildings and other structures
• Manufacture of copper under manufacturing of basic metals
• Additional criteria for agriculture (animal production and crop production)

The forestry and logging activity (in so far as it regards the TSC for the biodiversity and ecosystem objective) has proven to be particularly controversial – such that the Commission had to enlist the help of additional ad hoc experts and a whole annex (see Annex 1) in the report has been dedicated to explaining the dissenting views. It has been reported in the press that the Confederation of European Forest Owners (CEPF) are particularly concerned that if the Commission follows the PSF’s recommendations then “the great majority of European forest owners would not be able to fulfil the criteria and access a possible taxonomy compliant financing” (see here) and that the “arbitrary” forest management categories in the PSF report contradict current forest management practices.

The mining activity has also proven to be particularly tricky, with the PSF having to separate the mining activity from the manufacturing and processing of metal activity. For mining, the activity criteria have not been finalised “due to the complexity and diversity of the activity and gap in suitable data”, and so the PSF have set out the factors that they think need to be considered when designing that TSC. However, the PSF team focusing on manufacturing and processing have managed to come up with the criteria for copper.

For enabling activities, the PSF says that, due to limited resources and tight deadlines, efforts were focussed on the following proposals where experts were available:

• Marketplace for the trade of second-hand goods for reuse
• Provision of IT/OT data-driven solutions and software that provide a substantial contribution to circular economy
• Provision of IT/OT data-driven solutions that provide a substantial contribution to the use and protection of water and marine resources
• Manufacture and installation of, and associated services for leakage control systems enabling a substantial contribution to sustainable use and protection of water and marine resources
• Manufacture, installation, and servicing of high, medium and low voltage electrical equipment for electrical transmission and distribution that result in or enable substantial contribution to climate change mitigation

Part A of the report includes a framework methodology to describe ‘enabling activities’ – this is for members of the current and future Platforms and for the Commission when developing criteria for enabling activities. It is not intended as guidance for companies to decide on the enabling nature of their activities.

Part A also includes a number of recommendations for the Commission’s future work on the Taxonomy, including:

• There are some activities for which significant work has been developed in the past two years (detailed in the report) but which the PSF has not yet reached conclusion and the PSF recommends that the Commission continues that work.
• On “do no significant harm” (DNSH), there are some missing DNSH requirements for some of the environmental objectives and the PSF recommends that the Commission complete all DNSH criteria for all objectives for all activities. The PSF note that, just because do DNSH criteria have been recommended, this does not  mean that an activity cannot do significant harm to a particular objective (e.g. aviation and agriculture sectors).  
• The updating of the DNSH requirements for existing activities relating to the four remaining environmental objectives should be an area of focus for future work.
• The PSF also make a number of recommendations on the adaptation to climate change objective, including the need for guidance on the application of adaptation criteria and inclusion of further “adapted” activities in the forthcoming Delegated Act.

Part B of the report contains additional TSC that have been developed by the PSF in the past seven months for the following activities:

• Agriculture, forestry and fishing;
• Manufacturing;
• Civil engineering;
• Buildings;
• Transport;
• Restoration and remediation;
• Water supply; and
• Enabling activities

Next steps 

The Commission still needs to decide what to do with the PSF’s recommendations (in the March report and the supplementary report) and publish a Delegated Act with the TSC for the remaining four environmental objectives, before the end of the year. Although the PSF recommendations are not binding on the Commission, they carry significant weight. However, it still not clear when the Commission is likely to publish the Delegated Act.

Meanwhile, other aspects of the Taxonomy – in particular, the inclusion of nuclear and natural gas under the climate objectives – is the subject of several legal challenges (see our previous blog posts here and here).