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The Taxo4: Understanding the EU Taxonomy’s final 4 environmental objectives
Context - What are the 4 objectives?
The EU Taxonomy is essentially an encyclopedia, which lists economic activities that are environmentally sustainable. Its ultimate objective is to construct a common language and a clear definition of what is ‘sustainable’. It does so by establishing assessment criteria, named Technical Screening Criteria (TSC), that will screen the extent to which an economic activity qualifies as both environmentally and socially sustainable.
By sticking to one, transparent standard of what is sustainable, financial market participants will have more clarity in deciding which entities to invest in based on their sustainability scores. Making financial products which pursue environmentally sustainable objectives more visible is an effective way of channelling private investments into sustainable activities. It also enables the elimination of ‘Greenwashing’, since the fog is lifted and the authentic sustainability scores of an entity become clear.
The EU Taxonomy’s TSC can be broken down into three pillars.
- The first is the ‘Substantial Contribution’ pillar - this means that for an economic activity to be defined as sustainable, it must either significantly contribute to, or enable other activities to significantly contribute to, at least one of six environmental objectives listed in the EU Taxonomy.
- The second is the ‘Do No Significant Harm’ pillar (DNSH) - for an activity pursuing one or more of the six objectives to qualify as sustainable it cannot cause significant harm to any of the other 5 EU Taxonomy objectives.
- The third and final pillar is the ‘Minimum Social Safeguards’ Pillar (MSS) - the entity must demonstrate that its own social safeguards are in compliance with the standards of the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights.
This article will focus on the sustainability objectives that are relevant under the first two pillars.
The EU Taxonomy’s 6 Environmental objectives:
The EU Taxonomy Regulation establishes six environmental objectives, namely:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
The screening criteria required to measure how to make a substantial contribution to the first 2 criteria (climate change mitigation and adaptation) have already been set out in the first Climate Delegated Act. In short, an economic activity that pursues the environmental objective of climate change mitigation should contribute substantially to the stabilisation of greenhouse gas emissions by avoiding or reducing them, or by enhancing greenhouse gas removals. Secondly, an economic activity that pursues the environmental objective of climate change adaptation should contribute substantially to reducing or preventing the adverse impact of the current or expected future climate, or the risks of such adverse impact.
Currently, the EU Comission has not yet published its Delegated Act which will outline the final four environmental objectives (the Taxo4). However the Platform on Sustainable Finance (POSF) has drafted a report and detailed annex that establishes a detailed blueprint of technical recommendations for the four non-climate environmental objectives. The report covers over 60 economic activities in 12 sectors, including transport, fishing, manufacturing, water supply, waste management, and disaster risk management.
For more information on the composition of the POSF, check out our blog here.
Each of the EU Taxonomy environmental objectives are interconnected. This is evident both in the methods and effects that taking positive action towards one objective will have on the others. For example, pollution is a pressure that affects the state of the biodiversity and water, therefore reducing pollution will in turn mitigate pressure on biodiversity and water systems. For this reason, the transition to net-zero can only be considered as seriously sustainable if it takes a holistic approach, which is the aim of the broad scope of the Taxonomy.
The following section will outline the headline ambition levels of each of the taxo4 objectives, and demonstrate certain areas where TSC’s have been developed by the POSF in pursuit of these objectives.
Objective 3: Water and marine
Safeguarding the sustainable use and protection of water and marine resources is vital for a sustainable environment. Healthy marine and water resources play a pivotal role in climate and weather stabilisation, human livelihoods, transportation, carbon sinks, and more. Therefore, safeguarding the sustainable use and protection of water and marine resources is vital for a sustainable environment.
The headline ambition level of the EU Taxonomy for water and marine 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.
Areas in which TSC’s for water and marine were set include:
- Restoration and remediation of water and marine resources: e.g. the decontamination and/or remediation of soils and groundwater in polluted areas, and of surface water and its shores following accidental pollution.
- Water supply: e.g. the construction and operation of a new water supply system or an extension of an existing water supply system to provide water supply for new areas.
- Sewerage: e.g. urban wastewater treatment, phosphorous recovery from wastewater, production of alternative water resources, and sustainable urban drainage systems.
Alongside the EU Taxonomy, the further environmental strategies and policies that industries working with water and marine should comply with include:
- The Water Framework Directive
- Urban Waste Water Treatment Directive
- Nitrates Directive
- The Directive on the Reduction of National Emissions of certain Atmospheric Pollutants
- The Industrial Emissions Directive
- The Marine Strategy Framework Directive
Objective 4: The transition to a circular economy
The circular economy is a system that extends the lifecycle of products, for example by recycling, reusing, repairing, refurbishing, and sharing existing materials and products for as long as possible. Establishing a circular economy enables a more sustainable production and consumption model, whereby raw materials are used repeatedly and therefore kept longer in production cycles. This leads to a considerable reduction in waste generation. An economic activity can contribute substantially to the environmental objective of transitioning to a circular economy by increasing the durability, reparability, upgradability, and reusability of its products, or by reducing its use of resources via changing the design and choice of materials.
The headline ambition level of the EU Taxonomy for the circular economy is that:
‘By 2030 economic growth is decoupled from extraction of non-renewable resources and depletion of the stock of renewable resources is reversed, and by 2050 economic activity is largely decoupled from resource extraction, through environmental design for a circular economy to eliminate waste and pollution, keep materials and products in use at their highest value, and to regenerate ecosystems.’
Areas in which TSC’s for the transition to a circular economy were set include:
- Waste Management: e.g. the material recovery of secondary raw materials to substitute virgin materials or chemicals in production processes.
- Manufacturing of food products and beverages: e.g. Design for reuse and recycling of packaging in practice.
- Manufacturing and sale of footwear and leather goods: e.g. Spare parts should be available to customers for a period of at least 4 years from the date of purchase of the new product.
Alongside the EU Taxonomy, industries working toward a circular economy can follow The European Commission Circular Economy Action Plan for further guidance.
Objective 5: Pollution prevention
Pollution of the natural environment results from the introduction of substances, or contaminants into natural systems at levels that trigger harm or adverse change. Pollution has grave impacts on the health of the planet, humans, and biodiversity, plus it disproportionately impacts low-income communities. Therefore, it is imperative that urgent measures are taken to prevent pollution.
The headline ambition level of the EU Taxonomy for pollution prevention is:
‘By 2030, pollution sources, sinks and pathways due to human activities have been fully identified and measures have been applied that prevent and eliminate pollution across air, water, soil, living organisms and food resources. By 2030, the production and use of substances, materials and products is safe and taxonomy-aligned.’
Areas in which TSC’s for pollution prevention were set include:
- Restoration and Remediation: e.g. cleaning up oil spills and other pollution in terrestrial ecosystems, soil, buildings.
- Waste management: e.g. the treatment and disposal of radioactive nuclear waste, disposal operations.
- Depollution and dismantling of end-of-life products: e.g. the dismantling of end-of-life products and movable assets and their components of any type (e.g., ships, computers, components from wind turbines) for material recovery.
Alongside the EU Taxonomy, the further environmental strategies and policies that industries working to tackle pollution should comply with include:
- Towards a Zero Pollution for Air, Water and Soil
- EU Chemical Strategy for Sustainability
- DPSIR Framework
Objective 6: The protection and restoration of biodiversity and ecosystems
Healthy ecosystems are fundamental to human and animal welfare, as they supply fresh water, clean air, and nourishing food. Economic activities can considerably contribute to the protection and restoration of biodiversity and ecosystems in various ways, including by conserving, restoring, or protecting ecosystem services.
The headline ambition level of the EU Taxonomy for biodiversity and ecosystems is:
‘To ensure that by 2050 all of the world’s ecosystems and their services are restored to a good ecological condition, resilient, and adequately protected. The objectives of the EU Biodiversity Strategy will be achieved at latest by 2030. From today the world’s biodiversity needs to be put on the path to recovery and no deterioration in conservation trends and status of all protected habitats and species by 2030 will be ensured.’
Areas in which TSC’s for the protection and restoration of biodiversity and ecosystems were set include:
- Farming: e.g. agriculture should maintain or improve biodiversity via grazing in habitats where it is beneficial for biodiversity.
- Manufacturing: e.g. the selection of ingredients for food and beverage products should be sourced in a way that improves biodiversity and ecosystem health.
- Restoration of biodiversity and ecosystems: Assisting in the recovery of land, freshwater, or marine ecosystem to a good condition, resulting in improved physical and chemical conditions.
Alongside the EU Taxonomy, further environmental strategies and policies that industries working to tackle pollution should comply with include:
Next Steps and Greenomy’s Role:
The POSF is still finalising criteria for some remaining sectors including bioenergy and forestry, which will be featured in a complimentary report that will be released later in May 2022. The recommendations from the reports will feed into a new draft Delegated Act authored by the European Commission, which is expected to be published in the autumn of 2022.
Once the final delegated Act is released, Greenomy will incorporate the TSC’s from the Taxo4 objectives into its solution within 1 month, to ensure that all companies and financial market participants operating within the EU can stay up to date with the new EU Taxonomy reporting obligations in a fast and efficient manner.
Greenomy’s EU Taxonomy Solution aims to support investors, companies, financial institutions and auditors through the process and make sustainability reporting easy and cost-effective. Get in touch to learn more about how Greenomy can help you comply or if you wish to book a demo.