In the weeds of the EU Green Deal: What is a 'sustainable economic activity' anyway?

Anna Triponel

November 23, 2020

The EU’s Green Deal is getting down to brass tacks: the European Commission has released the draft of its delegated legislative act to define the criteria for ‘sustainable’ economic activities called for under the Green Deal. This ‘taxonomy’ is meant to standardise criteria for climate-friendly investments to both increase transparency and limit “greenwashing and market fragmentation” as the EU drives towards its goal of economy-wide net-zero greenhouse gas emissions by 2050.  And it’s not just about the carbon—respect for human rights is also a key part of the criteria.

About the proposed legislation

  • In an effort to meet the EU’s climate and energy targets for 2030, as well as its commitment to net-zero greenhouse gas emissions by 2050, the European Commission has developed a draft ‘taxonomy’ to classify sustainable and climate-friendly economic activities across the EU. These commitments were made under the European Green Deal starting in 2019 (you can read more about the European Green Deal here).
  • Following public feedback earlier this year on a draft roadmap to define the scope of the legislation, the EC has now published a draft of a delegated legislative act to adopt the taxonomy; the act is intended to supplement Regulation (EU) 2020/852 (“the Taxonomy Regulation”) of the European Parliament and of the Council, which adopts the European Green Deal.
  • The objective of the taxonomy is to “provide[] uniform criteria for companies and investors to determine which economic activities can be considered environmentally sustainable.”  The act “thus aims to increase transparency and limit the risk of greenwashing and market fragmentation in the classification of green activities and investment projects.”

What’s in the draft act?

  • The draft act sets out four criteria that economic activities must meet in order to be considered “environmentally sustainable”:
  • “it contributes substantially to one or more of the six environmental objectives set out in Article 9 of the Taxonomy Regulation in accordance with Articles 10 to 16 of that Regulation;
  • it does not significantly harm any of the other environmental objectives set out in Article 9 of the Taxonomy Regulation in accordance with Article 17 of that Regulation;
  • it is carried out in compliance with minimum (social) safeguards set out in Article 18 of the Taxonomy Regulation; and
  • it complies with technical screening criteria established by the Commission through delegated acts in accordance with Articles 10 (3), 11(3), 12(2), 13(2), 14(2) or 15(2) of the Taxonomy Regulation. The technical screening criteria need to specify the performance criteria for a specific economic activity that determine under what conditions i) the activity makes a substantial contribution to a given environmental objective; and ii) it does not significantly harm the other objectives.”
  • Annexes 1 and 2 to the draft act outline the technical screening criteria for specific sectors and activities and the criteria for determining whether an activity causes no significant harm to environmental objectives.
  • Sectors and activities covered include: agriculture and forestry; environmental protection and restoration; manufacturing of renewable energy technologies; manufacturing low-carbon technologies for transport, energy-efficient equipment for buildings, and more; renewable energy production and storage; water supply, sewage, waste management and remediation; transportation; construction and real estate; ICT including data processing and hosting; and research and development.

What does this mean in practice? Let’s dive a bit deeper on some of these criteria:

  • Article 9 of the Taxonomy Regulation sets out six environmental objectives for the Green Deal:
  1. climate change mitigation
  2. climate change adaptation
  3. (vii)the sustainable use and protection of water and marine resources
  4. (viii)the transition to a circular economy
  5. pollution prevention and control
  6. the protection and restoration of biodiversity and ecosystems
  • Articles 10 through 16 define the types of activities that can help to meet these six objectives. This includes both abstaining from activities that contribute to climate change and pollution, as well as the development and use of “process innovations or product innovations” that contribute to achieving environmental objectives.
  • Crucially, Article 18 lays out minimum requirements for protecting people in the context of sustainable economic activities; a company or activity must adhere to fundamental standards in order to meet the taxonomy criteria. Companies must ensure alignment with key international standards and frameworks on human rights and responsible business conduct, including the OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights, “including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.”

Next steps for the draft act

  • EU citizens and other stakeholders have four weeks to provide input on the draft text. Feedback can be submitted until 18 December 2020 by following the “Give Feedback” link on the initiative’s webpage.
  • Once the Commission has adopted the act, Parliament and Council generally have two months to formulate any objections. If there are no objections, the delegated act automatically enters into force.

You can read the draft act and its annexes in full—as well as provide feedback—on the EU classification system for green investments webpage.

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