- Category: Taxonomy
Transitional economic activities are a sub-category of environmentally sustainable economic activities under the Taxonomy Regulation, which cannot yet be replaced by technologically and economically feasible low-carbon alternatives but support the transition to a climate-neutral economy.
Transitional activities are activities for which low-carbon alternatives are not yet available and among others have greenhouse gas emission levels corresponding to the best performance (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, JC 2021 50, p. 38).
Legal definition of transitional economic activities in the context of sustainable finance legal framework is laid down in Article 10(2) of the Taxonomy Regulation. Accordingly, it is an economic activity for which there is no technologically and economically feasible low-carbon alternative, where it supports the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1,5 0C above pre-industrial levels, including by phasing out greenhouse gas emissions, in particular emissions from solid fossil fuels, and where that activity:
(a) has greenhouse gas emission levels that correspond to the best performance in the sector or industry;
(b) does not hamper the development and deployment of low-carbon alternatives; and
(c) does not lead to a lock-in of carbon-intensive assets, considering the economic lifetime of those assets.
Those activities can play a crucial role in mitigating climate change by substantially reducing their currently high carbon footprint, including by helping to phase out reliance on fossil fuels.
As was noted in the said Final report of 22 October 2021, the taxonomy is based on three categories, i.e. enabling, transitioning and “green”, but, by defining only two of these categories, the third category will not be visible to the customer. It was doubted that it would be feasible for products committing to a certain share of sustainable investments in line with the taxonomy to specify minimum proportions of transitional and enabling activities in the pre-contractual documents.
The commitment to a minimum share of taxonomy-aligned investments that would need to be met and monitored on a continuous basis was considered a challenge in itself and only a few products were believed to be able to make commitments on a more granular level. Therefore, it was expected that it would be possible to disclose a zero minimum share of transitional and enabling activities in the pre-contractual documents and to explain to investors that this is due to the lack of feasibility to make binding commitments, but that the actual share of investments in transitional and enabling activities would be disclosed in the periodic report.
More guidance and definitions on transitional activities in the sustainable finance legal framework can be found in the Commission Recommendation on facilitating finance for the transition to a sustainable economy (C(2023) 3844/3). The said Recommendation defines, in particular, the terms: “transition”, “transition finance” and “transition plan”. The relevant quotes are included below.
Transition means a transition from current climate and environmental performance levels towards a climate-neutral, climate-resilient and environmentally sustainable economy in a timeframe that allows reaching:
(a) the objective of limiting the global temperature increase to 1.5 °C in line with the Paris Agreement and, for undertakings and activities within the Union, the objective of achieving climate neutrality by 2050 and a 55% reduction in greenhouse gas emissions by 2030 as established in Regulation (EU) 2021/1119 of the European Parliament and of the Council,
(b) the objective of climate change adaptation, and
(c) other environmental objectives of the Union, as specified in Regulation (EU) 2020/852 as pollution prevention and control, protection and restoration of biodiversity and ecosystems, sustainable use and protection of marine and fresh-water resources, and the transition to a circular economy.
Transition finance means financing of investments compatible with and contributing to the transition, that avoids lock-ins, including:
(a) investments in portfolios tracking EU climate transition benchmarks and EU Paris-aligned benchmarks (‘EU climate benchmarks’);
(b) investments in Taxonomy-aligned economic activities, including:
- transitional economic activities as defined by Article 10 (2) of Regulation (EU) 2020/852 for the climate mitigation objective;
- Taxonomy-eligible economic activities becoming Taxonomy-aligned in accordance with Article 1(2) of Commission Delegated Regulation (EU) 2021/2178 over a period of maximum 5 (exceptionally 10) years;
(c) investments in undertakings or economic activities with a credible transition plan at the level of the undertaking or at activity level;
(d) investments in undertakings or economic activities with credible science-based targets, where proportionate, that are supported by information ensuring integrity, transparency and accountability.
Transition plan means an aspect of the undertaking’s overall strategy that lays out the entity’s targets and actions for its transition towards a climate-neutral or sustainable economy, including actions, such as reducing its GHG emissions in line with the objective of limiting climate change to 1.5°C.