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.
Article 1 point 3 of Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation
‘transitional economic activity’ means an economic activity that complies with the requirements laid down in Article 10(2) of the Taxonomy Regulation
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.
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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.
Taxonomy Regulation
Recital 41
In establishing and updating the technical screening criteria for the environmental objective of climate change mitigation, the Commission should take into account and provide incentives for the ongoing and necessary transition towards a climate-neutral economy in accordance with Article 10(2) of this Regulation. In addition to the use of climate-neutral energy and more investments in already low-carbon economic activities and sectors, the transition requires substantial reductions in greenhouse gas emissions in other economic activities and sectors for which there are no technologically and economically feasible low-carbon alternatives. Those transitional economic activities should qualify as contributing substantially to climate change mitigation if their greenhouse gas emissions are substantially lower than the sector or industry average, they do not hamper the development and deployment of low-carbon alternatives and they do not lead to a lock-in of assets incompatible with the objective of climate- neutrality, considering the economic lifetime of those assets. The technical screening criteria for such transitional economic activities should ensure that those transitional activities have a credible path towards climate-neutrality, and should be adjusted accordingly at regular intervals.
Article 10
Substantial contribution to climate change mitigation
1. An economic activity shall qualify as contributing substantially to climate change mitigation where that activity contributes substantially to the stabilisation of greenhouse gas concentrations in the atmosphere at a level which prevents dangerous anthropogenic interference with the climate system consistent with the long-term temperature goal of the Paris Agreement through the avoidance or reduction of greenhouse gas emissions or the increase of greenhouse gas removals, including through process innovations or product innovations, by:
(a) generating, transmitting, storing, distributing or using renewable energy in line with Directive (EU) 2018/2001, including through using innovative technology with a potential for significant future savings or through necessary reinforcement or extension of the grid;
(b) improving energy efficiency, except for power generation activities as referred to in Article 19(3);
(c) increasing clean or climate-neutral mobility;
(d) switching to the use of sustainably sourced renewable materials;
(e) increasing the use of environmentally safe carbon capture and utilisation (CCU) and carbon capture and storage (CCS) technologies that deliver a net reduction in greenhouse gas emissions;
(f) strengthening land carbon sinks, including through avoiding deforestation and forest degradation, restoration of forests, sustainable management and restoration of croplands, grasslands and wetlands, afforestation, and regenerative agriculture;
(g) establishing energy infrastructure required for enabling the decarbonisation of energy systems;
(h) producing clean and efficient fuels from renewable or carbon-neutral sources; or
(i) enabling any of the activities listed in points (a) to (h) of this paragraph in accordance with Article 16.
2. For the purposes of paragraph 1, an economic activity for which there is no technologically and economically feasible low-carbon alternative shall qualify as contributing substantially to climate change mitigation 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.
For the purpose of this paragraph and the establishment of technical screening criteria pursuant to Article 19, the Commission shall assess the potential contribution and feasibility of all relevant existing technologies.
Commission Delegated Regulation of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives
Recital 13
Transitional economic activities as referred to in Article 10(2) of Regulation (EU) 2020/852 cannot yet be replaced by technologically and economically feasible low-carbon alternatives but support the transition to a climate-neutral economy. 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. Technical screening criteria should therefore be established for those economic activities, where near-zero carbon solutions are not yet viable or where near-zero carbon activities exist, but are not yet practicable at scale, that have the highest potential for significant greenhouse gas reductions. Those technical screening criteria should ensure that an activity complying with them respects the safeguards of Article 10(2) of Regulation (EU) 2020/852, in particular that the activity has the greenhouse gas emissions corresponding to the best performance in the sector or industry, does not hamper the development and deployment of low-carbon alternatives and does not lead to a lock-in of carbon-intensive assets.
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.
Documentation
Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (Taxonomy Regulation), Recital 41, Article 10(2)
Commission Delegated Regulation of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives, Recital 13
Commission Recommendation on facilitating finance for the transition to a sustainable economy (C(2023) 3844/3)
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