La Française: Good things come to those who wait. But we can’t wait long!

21 april 2023

It has been over one year since the technical screening criteria (TSC) that define which economic activities can be considered as contributing substantially to Climate Change Mitigation and Adaptation have been set out, namely in the EU Taxonomy’s first Climate Delegated Act.

Given the interconnectedness of all six Environmental Objectives, the yet-to-be-defined screening criteria for the remaining four – i.e., Water and marine, Transition to a circular economy, Pollution prevention, and Protection & restoration of biodiversity & ecosystems (« Taxo4 ») – was understandably eagerly awaited by the market.

The Environmental Objectives are the backbone of the EU Taxonomy, the very foundation of an endeavour that seeks to build a common language around what can be considered « sustainable ».

To be defined as such, an economic activity must first and foremost either significantly contribute to, or enable other activities to significantly contribute to, at least one of these 6 Objectives.

Furthermore, an activity pursuing one or more of these Objectives must meet the Do No Significant Harm (DNSH) criteria relative to the remaining Objectives and Minimum Social Safeguards (MSS).

On 5 April, the European Commission launched a four-week consultation period on a new set of EU Taxonomy criteria for economic activities making such a substantial contribution to one or more of the non-climate Environmental Objectives.

The deadline for feedback is May 3rd and the Delegated Act could be adopted as soon as this year for implementation on 1 January 2024.

Taxo4 is the missing link to the Climate Delegated Act that will contribute to ensuring the speedy implementation of the European Green Deal. As with Climate Change and Mitigation criteria, the details of the remaining Objectives will undoubtedly spark heated debate across the market.

Defining Taxo4 also comes with an additional layer of complexity: as opposed to climate-focused Environmental Objectives, Taxo4 cannot rely on already-established climate scenarios aligned with the Paris Agreement. Biodiversity protection and restoration in particular is a multi-faceted undertaking, encompassing issues of natural habitats, endemism, species coexistence and the ecosystem services ultimately derived from those.

Apprehending the ambition of the substantial contribution criteria of Taxo4 – further complicated by the inevitable overlap of the Objectives – cannot be done via a single metric. That being said, the interconnection of the Environmental Objectives serves as a reminder that a holistic approach is the only realistic path to Net Zero – which is precisely the spirit of the EU Taxonomy.

Importantly, an early 2024 implementation of the Delegated Act would coincide with the coming into force of the Corporate Sustainability Reporting Directive (CSRD), which replaces the less ambitious Non-Financial Reporting Directive (NFRD).

The synchronised application of the two has substantial positive implications for asset managers: companies will integrate a broader scope of activities into their sustainability reporting, which in turn, will allow investors to have more granularity and visibility regarding the impact of investment decisions on the real economy.

We acknowledge and welcome the significant work undertaken to complete this draft Delegated Act, including some of the much-needed granularity it includes on topics such as in-situ conservation and the associated ecological mapping and definition of progress indicators. The next two weeks of consultation promise to be weeks of both scrutiny and deliberation.