EU Commission launches consultation on Taxonomy criteria

On 20 November the European Commission launched a public consultation on the EU Taxonomy criteria for the two sustainability objectives: climate change mitigation and climate change adaptation. The criteria are based on the Technical Screening Criteria previously published by the Technical Expert Group (TEG) but include both amendments and news.

The EU Taxonomy is the first classification system for sustainable economic activities, creating a common language that can help investors understand which assets and projects to finance to contribute to sustainable development. The Taxonomy Regulation, which came into force in July 2020, requires the European Commission to adopt delegated acts for climate change mitigation and climate change adaptation by 31 December 2020. The draft delegated acts proposed by the Commission were published on 20 November and are out for a four-week consultation period, still subject to change before final adoption by year-end.

The draft delegated acts cover climate change mitigation and climate change adaptation activities and are largely in line with the TEG’s proposal, with some notable differences. Overall, we see increased references to existing EU legislation and more extensive “Do No Significant Harm” criteria for many of the categories, which we consider to be a positive development.

Overall, we see increased references to existing EU legislation and more extensive 'Do No Significant Harm' criteria for many of the categories, which we consider to be a positive development.

Notable changes of categories for climate change mitigation

The criteria for Agriculture and Forestry have been extended, and the Agriculture sub-categories now follow a five-step approach of:

  1. Protection of non-agricultural land with high carbon stock from land use change,
  2. Establishment of a Farm Sustainability Plan,
  3. Compliance with essential management practices,
  4. Farm records and
  5. Verification of the yearly records and the Farm Sustainability Plan/Compliance with Technical Screening Criteria.

The Forestry categories follow a similar approach, with a four-step process including:

  1. Plan,
  2. Climate benefit analysis,
  3. Additionality and
  4. Guarantee of permanence.

The thresholds for household appliances, lighting appliances and cooling and ventilation systems now consider the top two energy classes to be aligned, compared to previously only allowing for the top energy class.

The NACE codes included under the category, Manufacturing of other low-carbon technologies, now cover a broad range of manufacturing activities and allow for alignment from, for example, manufacturing of furniture, jewellery, food, tools, machinery and electronics. Some criteria have also been more specified and seem to provide an opportunity for several companies not directly in the scope of the Taxonomy to be able to apply the criteria from this category.

For Manufacturing of materials including steel, cement, aluminium, reference to carbon capture and storage (CCS) has been explicitly included, and the threshold levels for these activities have been left blank, meaning that they may be revised. For Manufacturing of hydrogen, the criteria have been specified and the level tightened from direct emissions of 5.8tCO2e/t to lifecycle emissions of 2.256tCO2eq/ t.

The criteria for biogas and biofuel have been changed, and the reference to Annex IX, which is a list of eligible feedstocks, has now been replaced with a reference to REDII with broad criteria relating to land use change and a threshold for carbon savings (65%), which introduces some extra flexibility for biofuel producers.

For buildings built before 31 December 2020, in the previous version, the 15% most energy efficient buildings of the local stock were aligned. This has now been changed to only EPC class A. In Sweden, according to Boverket, only 1-2% of buildings are in class A, which makes this threshold significantly tighter than before. The criteria for the construction of new buildings is largely unchanged (20% below the Near Zero Energy Building requirement), with some more detailed requirements added for buildings larger than 5000m2.

In addition to the above, many of the other categories have been expanded and are now more comprehensive compared to the TEG version.

Many of the categories have been expanded and are now more comprehensive compared to the TEG version.

New categories for climate change mitigation

Restoration of Wetlands has been added and goes under its own section but follows the same four-step approach as the Forestry section.

In the Transport sector, the main changes are the introduction of criteria for sea and coastal shipping for both passenger and freight, and their retrofit. We note that transportation of fossil fuels is excluded. The draft Delegated Acts for climate change mitigation are now including the category Operation of personal mobility devices.

Research, development and innovation has been added as a category and enables companies with a focus on innovation for low carbon technologies to be aligned with the Taxonomy.

Climate change adaptation

The Delegated Acts for climate change adaptation have been extended and are now more comprehensive, largely following the categories for climate change mitigation. Two interesting developments are the inclusion of Education, Human health and social work activities, Arts, Events and Recreation.

 

We expect market participants to contribute to the ongoing consultation, and the European Commission will have to work fast to incorporate any changes to the final Delegated Acts in order for them to be approved by 31 December 2020 and come into force 1 January 2022.

Find out more about what EU sustainable finance regulation to watch in this interview with Tim Farrar, Head of Public Affairs for Nordea Large Corporates & Institutions.

About the authors:

Ebba Ramel, an analyst in Nordea's Sustainable Bonds team

 

Ebba Ramel is an analyst in Nordea’s Sustainable Bonds team.

 

 

Jacob Michaelsen, Head of Nordea Sustainable Finance Advisory

 

Jacob Michaelsen is Head of Sustainable Finance Advisory at Nordea.

For more on the Taxonomy and EU regulatory developments:

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