Take a look at other topics that we address in our EnviLaw newsletter #9:

• Carbon sequestration in agricultural land as a regulatory tool for reducing emissions

• Businesses will be subject to new sustainability due diligence obligations

• No more synthetic textiles? The EU wants to stop the release of microplastics into the environment

• Banks have to focus on the quality of disclosed information on sustainability

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Additional implementation guideline includes natural gas and nuclear power

The European Commission has adopted a complementary delegated act to , implementing economic activities related to nuclear energy and natural gas and defining the criteria upon the fulfilment of which these activities will be regarded as environmentally sustainable. However, it is a controversial step that is being widely discussed among politicians. Some member states are against the involvement of natural gas, others are against nuclear power.

At this point, the time limit for the review by the European Parliament and EU Council is running. These institutions may veto the complementary act, however, the consent of at least 353 members of the European Parliament or 20 member states representing at least 65% of EU citizens is necessary. If the regulation is not vetoed by the European Parliament or the EU Council, it will become effective as of 1 January 2023.

Since it is rather improbable that there are enough members of the European Parliament or votes of member states in the EU Council, certain states have decided to solve the issue of complementing the EU taxonomy per curiam. Austria and Luxembourg have already announced that they would enter a lawsuit at the Court of Justice of the EU; other states are also considering filing a lawsuit.

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PSF has published a technical screening criteria proposal for the remaining four environmental goals of the EU taxonomy

The Platform on Sustainable Finance (PSF) has published the final technical screening criteria proposal for the remaining four “non-climate” environmental goals of the EU taxonomy. These include:

• Sustainable use and protection of water and marine resources;
• Transition to a circular economy;
• Pollution prevention and control; and
• Protection and restoration of biodiversity and ecosystems.

In the methodological part, the PSF explains that activities were included in the proposal based on the analysis of their impact and potential for improvement of individual goals. At the same time it draws attention to the fact that the European Commission will have to take into account the possible overlap of certain goals while preparing this legislative proposal (e.g. gas pollutants may be addressed as part of the climate change mitigation goal, as well as pollution prevention and control). The proposal also includes the full list of economic activities and the related technical screening criteria together with their explanation. The proposal includes approximately 60 economic activities in 12 industries.

It is now the task of the European Commission to adapt the proposal of the PSF to a delegated act. The Commission is expected to issue the proposal in autumn 2022. Originally, the delegated act was supposed to become effective at the beginning of 2023. Due to the delay in the issue of the PSF proposal, it is uncertain whether it becomes effective in line with the original schedule.

The extension of the environmental taxonomy of the EU counts on including transitional and “non-sustainable” activities  

The PSF published a proposal for the expansion of the environmental taxonomy of the EU, also referred to as transitional taxonomy. The proposal anticipates a new classification of economic activities, which deviates from the dichotomy classification of activities to sustainable and non-sustainable (“green” and “non-green”) as follows:

• Green activities. Actually sustainable activities pursuant to the taxonomy, which meet the criteria of a substantial contribution to at least one environmental goal, not significantly impairing the remaining goals at the same time.
• Amber activities. Activities which do not meet the criteria of a substantial contribution to any environmental goal, but which could – upon the fulfilment of the determined conditions – be considered a taxonomically acceptable (transitional) investment.
• Red activities. Unsustainable activities which significantly harm some of the environmental goals.
• Low environmental impact activities. Activities with no significant environmental (and later also social) impact, which cannot be considered green, amber or red – pursuant to the PSF, up to 30% of all economic activities fall within this category.

The PSF expects the Commission to handle the proposal of the environmental taxonomy expansion after the issuance of the delegated act to the remaining four environmental goals, which is anticipated in autumn 2022.

The PSF presented the possible version of the EU’s social taxonomy

In the past quarter, the PSF published a final report on the possible expansion of the EU taxonomy with social aspects – i.e. the letter S of the sustainable abbreviation ESG.

The environmental taxonomy has been prepared mainly for the purpose of the transfer of private capital to more sustainable activities and should contribute to the achievement of the climate goals of the Paris Agreement and the Green Agreement for Europe in a broader context. One of the goals of the Green Agreement is a fair transition (leave no one behind) and the social taxonomy proposal aims at this goal. Similarly to the environmental taxonomy, social taxonomy should define the conditions upon the fulfilment of which certain economic activities are socially sustainable. Unlike environmental taxonomy where environmental protection is in everybody’s interest, the PSF defines groups of citizens for the social taxonomy, the interests of which should be protected: employees, consumers and local communities.

For the sake of greater clarity and the effort to avoid imposing an excessive burden on businesses, the PSF recommends retaining a similar structure to that of the environmental taxonomy, i.e.:

• Definition of (social) goals;
• Definition of the criteria of substantial contribution to the social goal;
• Definition of the criteria regarding doing no significant harm (DNSH); and
• Minimum safeguards.

The social taxonomy should include three basic social goals, and to each of them the PSF has also assigned the following partial goals:

1. Decent work (e.g. living wages or measures against forced or child labour)
2. Adequate living standards and well-being for end-users (e.g. safe products and services)
3. Inclusive and sustainable communities (e.g. approach to childcare)

The proposal of PSF also deals with the issue of minimum safeguards, which should include environmental aspects of corporate governance in the taxonomy (i.e. E and G of ESG). Above the framework of minimum safeguards in corporate governance, the PSF suggests the reinforcement of guarantees in the area of anti-corruption and bribery programmes, transparency and diversity.

The social taxonomy is currently prepared as a recommendation for the European Commission. The time frame for the presentation of the legislative proposal by the Commission has not been published so far.

The European Commission has specified the obligations regarding the reporting of non-financial information pursuant to the taxonomy

The obligation to report certain non-financial information pursuant to Article 8 of the Taxonomy became effective as of 1 January 2022 for the lists of non-financial information for FY 2021. Currently, the obligation to report in line with the taxonomy only applies to large public-interest companies with more than 500 employees. The reporting of non-financial information is described in the implementation guidelines for Article 8 of the Taxonomy.

Nevertheless, even these guidelines do not provide exact instructions on how to correctly report such information. The European Commission has therefore prepared an interpretation document, which answers the FAQ of obliged entities. The document includes detailed instructions for non-financial undertakings, as well as for individual financial undertakings, which are currently obliged to report non-financial data pursuant to the taxonomy and the NFRD (Non-Financial Reporting Directive).