Environmentally sustainable economic activities
- Category: Taxonomy
The concept of environmentally sustainable economic activities is applied by financial and non-financial undertakings which fall within scope of Article 8 of the Taxonomy Regulation, to assess whether an economic activity is environmentally sustainable, i.e. taxonomy-aligned. This assessment is carried out as part of the non-financial reporting of these undertakings.
Environmentally sustainable economic activities are defined in Article 3 of the Taxonomy Regulation. By defining environmentally sustainable economic activities, not undertakings, the taxonomy enables undertakings to transition by gradually increasing their share of environmentally sustainable activities (European Commission Recommendation (EU) 2023/1425 of 27 June 2023 on transition finance, C(2023) 3844).
Transparency of undertakings in non-financial statements
1. Any undertaking which is subject to an obligation to publish non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU shall include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9 of this Regulation.
2. In particular, non-financial undertakings shall disclose the following:
3. If an undertaking publishes non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU in a separate report in accordance with Article 19a(4) or Article 29a(4) of that Directive, the information referred to in paragraphs 1 and 2 of this Article shall be published in that separate report.
4. The Commission shall adopt a delegated act in accordance with Article 23 to supplement paragraphs 1 and 2 of this Article to specify the content and presentation of the information to be disclosed pursuant to those paragraphs, including the methodology to be used in order to comply with them, taking into account the specificities of both financial and non-financial undertakings and the technical screening criteria established pursuant to this Regulation. The Commission shall adopt that delegated act by 1 June 2021.
The key objective of the Taxonomy Regulation is to establish a unified classification system for sustainable economic activities to help reorient capital flows towards sustainable investments.
Concepts of sustainable investments and environmentally sustainable activities in the EU Sustainable Finance framework, ESMA, 22 November 2023, ESMA30-379-2279
According to the said Article 3 of the Taxonomy Regulation such activities must:
a. make a substantial contribution to one or more of the six taxonomy environmental objectives;
b. do no significant harm (DNSH) to the other environmental objectives (with further definitions of harm provided for each environmental objective defined in Article 17); and
c. meet taxonomy minimum safeguards; and
d. comply with technical screening criteria (TSC) established by the European Commission in delegated acts.
Activities fulfilling the above criteria are denoted as taxonomy-aligned economic activities, hence, when it comes to terminology, investments in environmentally sustainable economic activities are investments in taxonomy-aligned activities.
According to Article 4 of the Taxonomy Regulation (Use of the criteria for environmentally sustainable economic activities in public measures, in standards and in labels) Member States and the European Union is required to apply the aforementioned criteria to determine whether an economic activity qualifies as environmentally sustainable for the purposes of any measure setting out requirements for financial market participants or issuers in respect of financial products or corporate bonds that are made available as environmentally sustainable.
It is noteworthy, taxonomy requires ‘substantial contribution’ to environmental objectives for activities to be included.
The document titled: “FAQs, Commission Technical Expert Group on Sustainable Finance", published on the European Commission’s website, explains (p. 6):
“Activities that are not a part of the taxonomy are not necessarily ‘polluting’: There are plenty of economic activities with very limited negative environmental impact or with only incremental contribution to environmental objectives. The taxonomy will require ‘substantial contribution’ to environmental objectives for activities to be included. Therefore, activities that do not qualify under the taxonomy are not necessarily polluting. They will simply not be categorised.”
The technical screening criteria address both how economic activities can be considered to make a substantial contribution to the environmental objectives and how to respect the DNSH criterion.
The taxonomy also includes two sub-categories of activities, i.e.:
- enabling activities (Article 16 of the Taxonomy Regulation), and
- transitional activities (Article 10(2) of the Taxonomy Regulation).
There is an obligation to disclose for each financial product the proportion invested in those sub-categories.
The criteria for substantial contribution and technology readiness level rating can be established with the help of the March 2022 publication: “Development of the EU Sustainable Finance Taxonomy – A framework for defining substantial contribution for environmental objectives 3-6”, JRC, Canfora, P., Arranz Padilla, M. Polidori, O. Pickard Garcia, N. Ostojic, S. Dri, M.
SFDR interlinkages - sustainable investment
The SFDR Regulatory Technical Standard (RTS) of 6 April 2022 recognises environmentally sustainable economic activities (Taxonomy Regulation) as a subset of the SFDR Article 8 (light green) as well as Article 9 (dark green) products. Hence, investments into environmentally sustainable activities can be a subset of both these products.
Although this an almost inevitable consequence of the present status of the Level 1 legislation, it will have as unfortunate consequence to increase the complexity to the end investors.
As regards light green products the detailed rules for the calculation of the degree to which investments are in environmentally sustainable economic activities are stipulated in Article 17 of Commission Delegated Regulation od 6 April 2022 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.
In general, this degree is to be calculated according with the following formula:
market value of all investments of the financial product in environmentally sustainable economic activities / market value of all investments of the financial product.
European Commission published Notice of 13 June 2023 on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and links to the Sustainable Finance Disclosure Regulation (2023/C 211/01), where the Commission clarified that investments in ‘environmentally sustainable economic activities' within the meaning of the EU Taxonomy can be qualified as a ‘sustainable investment' within the meaning of the SFDR.
A comparative overview of the concepts of sustainable investments under SFDR and Taxonomy environmentally sustainable activities is included in the ESMA document of 22 November 2023: „Concepts of sustainable investments and environmentally sustainable activities in the EU Sustainable Finance framework” (ESMA30-379-2279) - see sustainable investment.