'Climate change adaptation' means the process of adjustment to actual and expected climate change and its impacts (Article 2(6) of the 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)). The scope of this term is explained in Recital 25 and Article 11 of the Taxonomy Regulation.
The above provisions explain that economic activity that pursues the environmental objective of climate change adaptation should contribute substantially to reducing or preventing the adverse impact of the current or expected future climate, or the risks of such adverse impact, whether on that activity itself or on people, nature or assets.
That environmental objective should be interpreted in accordance with relevant Union law and the Sendai Framework for Disaster Risk Reduction 2015–2030.
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Potential practical use cases regarding climate change adaptation have been described in the document prepared for the European Commission in June 2023: "The EU Taxonomy User Guide" (p. 24 - 28) - see extract below.
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Use Case: Aligning with best practices in adapting to impacts of climate change How can my company demonstrate leadership on adapting to the physical impacts of climate change? How does the EU Taxonomy support this ambition?
Context
If your company falls under the scope of the NFRD/CSRD, you will be required to disclose information on your company's operational and capital expenditures towards adapting certain activities to the impacts of climate change. The EU Taxonomy supports businesses in becoming more resilient to climate change by providing criteria to determine what can be considered as making a substantial contribution to climate change adaptation. Making this information available can signal to financial institutions and the wider public that your company is addressing physical risks of climate change in a comprehensive way. This can have positive effects on your company's reputation and improve your access to capital. If you are not obliged to disclose your physical climate risks under the EU Taxonomy it is still of great benefit to conduct a climate risk and vulnerability assessment in an EU Taxonomy-compliant way - for a variety of reasons: First, it gives you the opportunity to voluntarily disclose your expenditure for climate adaptation. Second, financial institutions (e.g, banks), investors and customers might expect you to act on or disclose information related to climate risks. Third, you may be able to profit from easier access to the capital markets, helping you to make the necessary upfront investments in climate-resilience that are likely to pay off in the future.
Proposed approach to address your challenge
Step 1 - Check whether your company is conducting any activities that are currently identified as having the potential to make a substantial contribution to climate change adaptation in the EU Taxonomy (i.e., whether the activities are Taxonomy eligible' - see Use Case 1).
Step 2 - If you have not yet taken any steps to deal with the impacts of climate change on these activities, screen each of your company's activities to find out what climate-related hazards from Appendix A of Annex Il of the Climate Delegated Act may affect the performance of the activities during their expected lifetime. For example, a logistics company that uses inland freight water transport might be negatively affected by an increased frequency of days with low levels of water caused by climate change on important shipping routes as this forces them to reduce the loads on their vessels.
Step 3 - Where an activity could be affected by one or more hazards leading to physical impacts, conduct a thorough climate risk and vulnerability assessment. Such an assessment will point towards the actions that need to be taken to reduce possible risks. Choosing your approach, you need to consider your resources and your data availability. Regarding the risk assessment approach, the EU Taxonomy allows for flexibility, as long as the chosen approach is based on best practice and available guidance and is in line with state-of-the-art science on risk and vulnerability assessments from the Intergovernmental Panel on Climate Change (IPCC) reports and scientific peer-reviewed publications. One appropriate way to make sure your assessment approach is based on a recognised quality standard is to follow the guidelines on vulnerability, impacts and risk assessment outlined in the European Standard EN ISO 14091:2021 for adaptation to climate change. For such a standardised risk assessment you need to: (1) screen impacts from climate change and develop climate impact chains showing how your activities are affected by the identified hazards; (2) identify indicators for these impacts; (3) acquire and manage data for those indicators; (4) aggregate indicators and risk components; (5) assess your adaptive capacity; (6) interpret and evaluate your findings; (7) analyse cross-sectoral dependencies; and, (8) conduct an independent review of your findings. Especially if you are a SME, guidance materials, like the Climate Expert Tool, can help you identify and assess the climate impacts most relevant for your company. For example, for the above-mentioned logistics company this would mean, among other things, to show how days with low levels of water have affected transport loads in the past and investigate in how far the number of such days will increase in the future as a result of the ongoing change of the climate.
Step 4 - Ensure that the climate projections used correspond to the lifespan of the activity. This is important because if you plant a forest or build a factory with a 60-year lifespan, you have to plan further into the future than if you plant a meadow or build a pump with a 15-year lifespan. Shorter time frame climate projections may be able to employ simpler techniques (for example, extrapolation of past climate change trend data) while longer timeframe projections require more complex assessments (for example, climate impact modelling). The Climate Delegated Act specifies that:
For example, the logistics company could use a scientific study on the impacts of climate change on the two rivers on which the company conducts most of its business as one source of its assessment. The study uses a range of state-of-the-art climate projections across different scenarios and time periods. The study transparently discloses its methodologies, for example climate models employed and data sources which are recent, state of the art and reliable and the study is expert/peer-reviewed and published by a reliable entity.
Step 5 - Select adaptation solutions in a fashion that is tailor-made to the results of the assessment and the context, in which the solution is implemented. The adaptation solutions need to be integrated in an adaptation plan that ensures that all solutions collectively significantly reduce the identified impacts. For example, given that the logistics company wants to reduce the risk of reduced transport loads during low water levels, one solution would be an update of the fleet with lightweight vessels that operate better under such conditions. The assessment has shown that this solution is financially feasible and practically implementable and will not affect the adaptation efforts of others nor contradict local and regional adaptation plans. Because this physical solution is covered by another activity in the adaptation Annex, 6.8. Inland freight water transport, the company has made sure that the solution complies with the DNSH criteria of that activity.
Step 6 - Implement the suitable adaptation solutions. Expenditures arising for the implementation can be reported at the end of each year as expenditures that contribute towards the adaptation objective of the EU Taxonomy. For example, the expenses for purchasing lightweight vessels by the logistics company could then be reported as taxonomy-aligned expenditure.
Step 7: Set-up a monitoring and measurement system. When implementing adaptation solutions, the entity needs to define indicators to monitor the effectiveness of the solution. If the indicators are not met, remedial action need to be taken. For example, for the monitoring of the solution, the company has defined an indicator that measures the target tonnes of freight transported on low water level. After the purchase and operation of the lightweight vessels they identify that the target indicator is not met as on some days the water levels are so low that the company can load the lightweight vessels only with half their freight capacity. The company considers remedial measures and decides to outsource to additional road transport to make up for the freight that cannot be transported on the waterway.
References to recommended resources:
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Use Case: Helping others to adapt to impacts of climate change How does your company benefit from the EU Taxonomy if it conducts activities that enable others to adapt to impacts of climate change?
Context
As an entity that falls under the scope of the NFRD/CSRD, you will need to disclose information on how and to what extent your activities are aligned with the EU Taxonomy. If your company conducts activities that enable others to adapt to the impacts of climate change, the associated revenues and capital expenditures and operational expenditures may be taxonomy-aligned. Reporting them can enhance your reputation and improve your access to capital.
Proposed approach to address your challenge
Step 1 - Check which of your activities, services or solutions that are enabling others to adapt are covered in the EU Taxonomy. Which exact activities are eligible is defined in the description of the activity" sections in Annex Il of the Climate Delegated Act. To date, business operations in the following areas are eligible as 'enabling" activities for climate change adaptation:
For example, an engineering company that plans a system of drinking water fountains for a municipality can identify this activity as being eligible under the EU Taxonomy's adaptation enabling activity Engineering activities and related technical consultancy dedicated to adaptation to climate change. In addition, activities in the following sectors are eligible as adapted-enabling activities. That is, they qualify as adapted activities where they meet the first four technical screening criteria for substantial contribution, and as enabling activities where they meet the fifth technical screening criterion for substantial contribution (and therefore can claim their revenue as Taxonomy-aligned in addition to their CapEx and OpEx):
Step 2 - Ensure that the activity fulfil the "technical screening criteria (see Use Cases 2 for more information). In general, your activity, service or solution qualifies as enabling if you show that it can directly help others (people, nature, cultural heritage, assets, or other economic activities) to adapt to climate change impacts.
Step 3 - Show how you can enable adaptation, assess current and future climate risks for your targeted field of action, client or customer. For example, the engineering company that develops drinking water fountains needs to show how heat risks in its client municipality are significantly exacerbated by climate change. The assessment needs to touch on the possible uncertainties in climate projections and be based on robust data. Climate data for such an assessment can for example be accessed through the Copernicus services managed by the European Commission (for more information on climate risk assessments see Use Case 5). Maybe you can also refer to a climate risk assessment conducted by your client or related to your activity. Taking the example of the engineering company that develops drinking water fountains, heat risks have probably been already identified for their activity locations in a national or local climate risk or vulnerability assessment.
Step 4 - Demonstrate that the primary objective of your activity is to provide or promote the use of a technology, product, service, information or practice that (1) either increases the level of resilience to physical climate risks, or (2) contributes to adaptation efforts. For example, drinking water fountains when installed in heat stressed areas especially when aligned with an adaptation strategy in the company's area of action are to be seen as having the primary objective described above. By referring to this strategy, the company could show that it is contributing to adaptation.
References to recommended resources:
Source: The EU Taxonomy User Guide, Document prepared for the European Commission, June 2023, p. 24 - 25 |
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