For each of the six environmental objectives, the European Commission will need to adopt technical screening criteria (“TSC”) and this will be done through delegated acts.

The TSC will set out what it means for economic activities to be substantially contributing to the environmental objective in question and noting what constitutes causing significant harm to the other objectives. The TSC will be developed using available scientific evidence and by taking into account life-cycle considerations. The TSC is intended to be updated regularly, given the dynamic nature of science and technology.

The draft delegated act for the TSC for climate change mitigation and climate change adaptation have been released and the draft (in particular, the annexes) set out the conditions under which a range of economic activities qualify as contributing substantially to climate change mitigation or climate change adaptation and conditions for determining whether an economic activity causes “no significant harm” to any of the other environmental objectives.

The annexes specify the applicable TSC for the following nine areas of economic activity:

  • agriculture and forestry;
  • environmental protection and restoration activities;
  • manufacturing;
  • energy;
  • water supply, sewerage, waste management and remediation activities;
  • transport;
  • construction and real estate;
  • information and communication; and
  • professional, scientific and technical activities.

In addition to the list above, Annex II, which relates to climate change adaptation, also specifies the applicable TSC for the following areas:

  • financial and insurance activities;
  • education;
  • human health and social work activities; and
  • arts, entertainment and recreation.

For example, if the environmental objective is climate mitigation and the economic activity in question is the construction of new buildings, the TSC for the project, under the draft, is as follows:

1. Substantial Contribution to Climate Change Mitigation

(a)  The primary energy demand of the new building must be at least 20% lower than that under the  nearly zero-energy building requirements under the Energy Performance of Buildings Directive.

(b)  If the building is larger than 5000 square meters:

(i)  upon completion, the new building must undergo testing for air-tightness and thermal integrity, and any deviation in the levels of performance set at the design stage or defects in the building envelope must be disclosed to investors and clients; and

(ii)  the life cycle Global Warming Potential of the new building must be calculated for each stage in the life cycle and disclosed to investors and clients on demand.

2. Do No Significant Harm (“DNSH”)

ENVIRONMENTAL OBJECTIVE DNSH CRITERIA
Climate Change Adaptation 
  • The economic operator of the project must develop a plan to implement adaptation solutions to reduce material physical climate risks to the activity (as identified through a climate risk and vulnerability assessment).
  • The adaptation solutions must not negatively affect the adaptation efforts or the level of resilience to physical climate risks of other people, nature, assets and of other economic activities.
Sustainable use and protection of water and marine resources 
  • Where water appliances are installed, the specified water use for the water appliances must be attested by product datasheets, a building certification or an existing product label in the Union, in accordance with Appendix D of Annex I.
  • Environmental degradation risks related to water quality preservation and avoidance of water stress must be identified and addressed, in accordance with a water use and protection management plan.
Transition to a circular economy
  • At least 70% (by weight) of the non-hazardous construction and demolition waste generated on the construction site must be prepared for re-use, recycling and other material recovery (excluding  naturally occurring material referred to in the European List of Waste).
  • The economic operator must limit waste generation in processes related to the construction.
  • Building designs and construction techniques must support circularity and show how they are designed to be more resource efficient, adaptable and flexible to facilitate reuse and recycling.
Pollution prevention/control
  • The building components and materials used must not contain asbestos or substances of very high concern.
  • If the building components and materials may come into contact with occupiers, they must emit, per m³ of material or component, less than 0.06mg of formaldehyde and less than 0.001 mg of categories 1A and 1B carcinogenic volatile organic compounds.
  • Where the new construction is located on a potentially contaminated site, the site must be investigated for potential contaminants. 
  • The economic operator must attempt to reduce noise, dust and pollutant emissions during construction or maintenance works.

Protection and restoration of biodiversity ecosytems
  • An Environmental Impact Assessment (EIA) or screening must be carried out and the required mitigation and compensation measures for protecting the environment must be implemented.
  • If the site is located in or near biodiversity-sensitive areas, the economic operator must conduct an appropriate assessment and implement the necessary mitigation measures per the conclusions of the assessment.
  • The new construction must not built on one of the following:

(a) arable land and crop land with a moderate to high level of soil fertility and below ground biodiversity;

(b) greenfield land of recognised high biodiversity value and land that serves as habitat of endangered species (flora and fauna) listed on the European Red List or the IUCN Red List;

(c) forest land (whether or not covered by trees), other wooded land or land that is partially or wholly covered or intended to be covered by trees.

The delegated act for the screening criteria for the first two environmental objectives was originally planned to be adopted by 31 December 2020 so that it may apply from 1 January 2022, but due to the number of responses received during the consultation period, this has been delayed and a new proposal is to be released.

The delegated acts for the screening criteria for the remaining four environmental objectives are planned to be adopted by 31 December 2021, so that they may apply from 1 January 2023.

Conclusion

The Taxonomy Regulation will be a very useful tool for all market participants looking to finance green projects. It will help to provide much need clarity, for borrowers and lenders, using the new EU-wide classification system in determining the sustainability of all economic activities and is likely to prevent inadvertent greenwashing taking place.

The Taxonomy Regulation will also serve as the starting point for other EU sustainability projects in the financial sector, such as the EU Ecolabel, which will be given to financial products that can show that a minimum of 60% of the investments are aligned with the Taxonomy Regulation, and the EU Green Bond Standard, which seeks to create an official standard for green investments by standardising reporting and verification processes.