Principle of do no significant harm (DNSH)
- Category: Taxonomy
The concept of avoiding significant harm - the principle of 'do no significant harm’ (DNSH) - is expressed across both:
- the SFDR (Article 2(17)) and
- the Taxonomy Regulation (Article 17).
Under the latter it is among the preconditions qualifying environmentally sustainable economic activities.
SFDR refers to DNSH in its definition of ‘sustainable investment’.
ESA’s Final report of 22 October 2021 on taxonomy-related product disclosure RTS with regard to the content and presentation of disclosures pursuant to Article 8(4), 9(6) and 11(5) of Regulation (EU) 2019/2088 reads:
“The EU taxonomy sets out a “do not significant harm” principle by which taxonomy-aligned investments should not significantly harm EU taxonomy objectives and is accompanied by specific EU criteria.
The “do no significant harm” principle applies only to those investments underlying the financial product that take into account the EU criteria for environmentally sustainable economic activities.
The investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable economic activities.
Any other sustainable investments must also not significantly harm any environmental or social objectives" (JC 2021 50, p. 36).
DNSH principle is to be specified through the European Commissions' delegated acts.
Article 2a of SFDR grants the European Supervisory Authorities (the ESAs) the power to develop draft regulatory technical standards to specify the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’ (see ESAs Final Report of 2 February 2021 on draft Regulatory Technical Standards with regard to the content, methodologies and presentation of disclosures pursuant to Article 2a(3), Article 4(6) and (7), Article 8(3), Article 9(5), Article 10(2) and Article 11(4) of Regulation (EU) 2019/2088, JC 2021 03).
Further, the power is delegated to the European Commission to supplement the SFDR by adopting the relevant regulatory technical standards.
This mandate has been fulfilled on 6 April 2022 when the European Commission adopted Commission Delegated Regulation supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’, specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports.
Chapter III of the said Regulation lays down requirements on compliance with the ‘do not significant harm’ principle in relation to the Principal Adverse Sustainability Impacts (PAI) in Annex I.
Definitions of significant harm are established for each environmental objective.
For example, as regards climate change mitigation, an activity is deemed to cause significant harm where it leads to significant greenhouse gas emissions, on a lifecycle basis.
DNSH principle is conceptually related to Principal Adverse Sustainability Impacts.
Recital 22 of the said Commission Delegated Regulation of 6 April 2022 explains:
“The principle of ‘do not significant harm’ is linked to the disclosures of principal adverse impacts of investment decisions on sustainability factors. For that reason, financial product disclosures about the ‘do not significant harm’ principle should explain how the indicators for adverse impacts have been taken into account”.
The “does not significantly harm” principle of the Taxonomy Regulation focuses on the six environmental objectives recognized by the Taxonomy Regulation. The “principal adverse impact indicators” of the SFDR have, however, a broader scope, ranging from environmental indicators to social and employee, respect for human rights, anti-corruption, and anti-bribery matters.
According to the said Recital 22:
- the ‘do not significant harm’ principle is particularly important for dark green products as compliance with that principle is a necessary criterion to assess whether an investment delivers the sustainable investment objective;
- that principle is, however, also relevant for light green products where those financial products make sustainable investments, as financial market participants should disclose the proportion of sustainable investments made;
- financial market participants that make available light green products which partly make sustainable investments or dark green products should thus provide information relating to the ‘do not significant harm’ principle.
It is also stated that, as the above disclosures are closely linked to the Taxonomy Regulation, it is appropriate to require additional information on the alignment of the investments with the minimum safeguards set out in that Regulation.