European Commission consults on draft Delegated Acts with technical screening criteria for Taxo 4 and additional criteria for climate

On 5 April 2023, the European Commission published, for consultation:

• a draft Delegated Act with technical screening criteria (“TSC”) for the remaining four environmental objectives under the Taxonomy Regulation (the “Draft Taxonomy Environmental Delegated Act”); and
• a draft Delegated Act that amends the existing Taxonomy Climate Delegated Act.

Both draft Delegated Acts are accompanied by several Annexes which contain the detailed TSC – the Annexes can be found on this Commission webpage.

The two draft Delegated Acts build on the recommendations of the Platform on Sustainable Finance (PSF), which were submitted to the Commission in March and November 2022 (see our previous blog posts here and here).

The consultation on the two draft Delegated Acts closes on 3 May 2023 (see “Next steps” below).

Draft Taxonomy Environmental Delegated Act

The remaining four environmental objectives (aka “Taxo4” or “Taxo 4”) cover the following areas:

• 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.

The Draft Taxonomy Environmental Delegated Act covers the following sectors:

• manufacturing;
• water supply;
• sewerage;
• waste management and remediation;
• construction;
• civil engineering;
• disaster risk management;
• information and communication;
• environmental protection; and
• restoration and accommodation activities.

The Commission says it has decided to prioritise those economic activities and sectors that were identified as having the biggest potential to make a substantial contribution to one or more of the four environmental objectives, and for which it was possible to develop or refine the TSC without further delay. For certain sectors and activities, such as agriculture, forestry or fishing, as well as certain manufacturing activities, a further assessment and “calibration” of criteria will be needed. In particular, the decision not to give a green label to waste incineration has been welcomed by environmental NGOs.

The Commission has said that due to time constraints, the Commission and the PSF were not able at this stage to develop climate adaptation criteria for the activities included in the Taxonomy Environmental Delegated Act to make them adapted to climate change. The Commission aims to develop those TSC in the future.

The Draft Delegated Act also amends the Taxonomy Disclosures Delegated Act to ensure financial and non-financial undertakings are required to disclose the relevant taxonomy eligibility and alignment information in relation to the activities covered by the Draft Taxonomy Environmental Delegated Act.

The Draft Delegated Act will come into effect from 1 January 2024, and so financial market participants (FMPs) disclosing under the Sustainable Finance Disclosure Regulation (SFDR) will be able to disclose the Taxonomy alignment for their financial products against the Taxo 4 environmental objectives from that date, if they wish to do so (assuming of course that the TSCs are finalised in time to enable FMPs to make that assessment). 

With respect to the obligation under Article 8 of the Taxonomy Regulation on certain financial and non-financial undertakings to report on the Taxonomy eligibility and alignment of their business activities, according to draft Article 5 of the Draft Delegated Act:

• non-financial undertakings would have to disclose taxonomy eligibility from 1 January to 31 December 2024 and taxonomy alignment from 1 January 2025; and
• financial undertakings would have to disclose taxonomy eligibility from 1 January to 31 December 2024 and taxonomy alignment from 1 January 2026. (Note: Although Article 5 suggests a 31 December 2024 end date for eligibility reporting, we think this may be an error given the 2026 start date for the alignment reporting.)

Draft Delegated Act amending the Taxonomy Climate Delegated Act

This Draft Delegated Act amends the existing Taxonomy Climate Delegated Act to include climate adaption and mitigation TSC for additional economic activities. The Commission says it also makes limited amendments of a technical nature to improve implementation of the Taxonomy Climate Delegated Act.

The additional economic activities notably concern:

• some manufacturing activities in relation to key components for low carbon transport and electrical equipment, which can help achieve greenhouse gas emissions savings in other target activities; and
• some transitional activities in the transport sector (waterborne transport and aviation) where zero-carbon solutions are not yet sufficiently advanced, and where their inclusion represents what the Commission believes to be an effective way to help incentivise improvements beyond the status quo. However, note that the decision to include aviation and shipping has already elicited criticism from some camps (see here).

This Draft Delegated Act will also come into effect from 1 January 2024, and so again FMPs disclosing under the SFDR will be able to disclose the Taxonomy alignment for their financial products (for climate adaptation / mitigation) against these new activities from that date.

Firms should be mindful of the technical changes that are being proposed by the Commission to the climate TSCs, as (if they go ahead) they could impact on the existing Taxonomy eligibility / alignment disclosures published by firms for their products or business activities.

Next steps 

The consultation on the two draft Delegated Acts closes on 3 May 2023. The Commission will then decide (based on feedback from the consultation) whether to make any changes to the two drafts and will adopt the two Delegated Acts.

Once the Commission has adopted the two Delegated Acts, the European Parliament and Council will then have four months (which can be extended by an additional 2 months if either party requests it) to scrutinise the Delegated Acts. They do not  have the power to amend the Delegated Acts – the most they can do is veto it.

Provided neither the European Parliament nor the Council object to either of the Delegated Acts, these would then be published on the Official Journal of the EU and would apply from 1 January 2024.

The Commission has also updated its existing EU Taxonomy Compass website – now embedded in a new website called 'EU Taxonomy Navigator', which provides a number of online tools to help users understand the EU Taxonomy.

In addition, the Commission plans to establish a Stakeholder Request Mechanism to address suggestions on which new activities could be included in the EU Taxonomy or on possible amendments to the TSC of existing activities.