PLATFORM ON SUSTAINABLE FINANCE: TECHNICAL …

1 1 PLATFORM ON SUSTAINABLE FINANCE: TECHNICAL WORKING GROUP Taxonomy pack for feedback August 2021 2 This is a long report. Please think before printing. DISCLAIMER The PLATFORM on SUSTAINABLE Finance (PSF) is seeking feedback on its TECHNICAL work to date. Neither this report nor its specific contents represent recommendations of the PSF. This document is not an official Commission document nor an official Commission position. Nothing in this document commits the Commission nor does it preclude any policy outcomes. 3 Table of Contents ABOUT THIS DOCUMENT .. 5 PART A: EXPLANATION OF THE TAXONOMY APPROACH .. 6 1. Background .. 6 2. Purpose of the Taxonomy .. 7 3. Taxonomy approach explained .. 8 Requirements for designing taxonomy criteria .. 8 Taxonomy sector framework .. 9 Prioritised economic activities .. 10 Prioritisation for objectives 3-6 vs.

2 Approach on climate objectives .. 11 Data on environmental impact and improvement potential .. 12 Selection of priority activities .. 14 Other activities prioritised .. 15 Composition of the TECHNICAL Working Group and sector 16 4. Defining headline ambition levels for environmental objectives .. 20 Objective 3 The SUSTAINABLE use and protection of water and marine resources 23 Objective 4 The transition to a circular economy .. 25 Objective 5 pollution prevention and control .. 27 Objective 6 The protection and restoration of biodiversity and ecosystems 29 5. Methodology for developing TECHNICAL screening criteria explained .. 31 Substantial contribution types .. 32 Possible approaches .. 33 6. Understanding Environmental Objectives .. 36 Clarifying substantial contribution to Objective 3 - SUSTAINABLE use and protection of water and marine resources.

3 36 4 Clarifying substantial contribution to objective 4 - Transition to Circular economy 43 Clarifying substantial contribution to objective 5 - pollution prevention and control 49 Clarifying substantial contribution to Objective 6 The protection and restoration of Biodiversity and Ecosystems .. 54 Future horizontal analysis of adaptation .. 66 Understanding the scope of economic activities and the link with assets . 71 Part A Annex .. 73 I. Annex A1 - Application of the methodology to identify priority activities .. 73 i. SUSTAINABLE use and protection of water and marine resources .. 73 ii. Transition to a circular economy .. 75 iii. Pollution prevention and control .. 77 iv. Protection and restoration of biodiversity and ecosystems .. 79 v. Activities directly improving the state of the environment / healing the environment 80 II. Annex A2: Relevant targets & reference points for headline objectives.

4 82 i. Objective 3: SUSTAINABLE use and protection of water and marine resources 82 ii. Objective 4: Transition to a Circular Economy .. 86 iii. Objective 5: Pollution prevention and control .. 88 iv. Objective 6: Protection and restoration of biodiversity and ecosystems .. 89 Part B: Feedback materials .. 92 1. Feedback questions .. 96 2. Example TECHNICAL Screening criteria Template .. 98 Part B Annex: Full list of TECHNICAL Screening criteria (separate document) .. 100 5 ABOUT THIS DOCUMENT This document is structured into two parts: Part A and its Annex describes the EU taxonomy approach, the activities considered, and the methodological framework followed. Part B and its Annex includes the feedback materials, consisting of: The questions on which we invite stakeholders to provide feedback The proposed draft TECHNICAL screening criteria on which feedback from stakeholders is sought.

5 (see Part B: Feedback materials) Stakeholders are invited to provide feedback on this document from 3rd August 2021 until 24th September 2021. The feedback received will be analysed by the PLATFORM on SUSTAINABLE Finance and be integrated where possible and where relevant to improve the robustness of the TECHNICAL screening criteria . This will happen between September and October, with the aim of preparing the PSF Taxonomy report by November 2021. 6 PART A: EXPLANATION OF THE TAXONOMY APPROACH 1. Background In line with the Article 20 of the Taxonomy Regulation ((EU) 2020/8521), the European Commission has set up a permanent expert group, the PLATFORM on SUSTAINABLE Finance. The PLATFORM on SUSTAINABLE Finance will assist the Commission in developing its SUSTAINABLE finance policies, notably the further development of the EU taxonomy. The PLATFORM operates through a plenary in full composition of all 57 members and 10 observers, supported by subgroups where the TECHNICAL work on its opinions, reports or recommendations takes place.

6 The PLATFORM on SUSTAINABLE Finance is in particular tasked with: Advising the Commission on the TECHNICAL screening criteria on environmental objectives in line with Article 19 Advising on the possible need to update those criteria Analysing the impact of the TECHNICAL screening criteria in terms of potential costs and benefits Assisting the Commission in analysing requests from stakeholders to develop or revise TECHNICAL screening criteria for a given economic activity (request system will be set up in 2021) The first of its tasks is the subject of this report and call for stakeholder feedback specifically to gather further evidence and feedback on proposed draft TECHNICAL screening criteria . The draft criteria presented in this report are working documents of the PLATFORM and do not represent a final view of the PLATFORM . They are presented to gather feedback so that they can be improved and developed before a final set of recommendations and criteria are proposed to the Commission in November.

7 The work is detailed at this stage, but will be refined over 1 EUR-Lex - 32020R0852 - EN - EUR-Lex ( ) 7 time for clarity and brevity. To see how resolved criteria are presented, refer to the Taxonomy Compass. The following sections of this document set out the background and methodology used to develop the criteria , the questions on which stakeholder feedback is sought, and the draft criteria themselves. 2. Purpose of the Taxonomy The European Union (EU) is committed to meeting the aims of the European Green Deal and to transforming the EU into a modern, resource-efficient, and competitive economy. As set out in the European Green Deal2, the EU will face and pursue various economic reforms, including the decarbonization of the energy system, the transition to a circular economy, and the reverse of the alarming declines in ecosystems and biodiversity.

8 Addressing the environmental challenges in the EU will help to achieve the broader international environmental objectives, such as those set out in the Paris Agreement; however, it will also require tremendous investments and innovations across sectors. Just to meet the climate and energy targets set for 2030 and mitigate climate change, the EU faces an investment gap of EUR 350 billion per year. Moreover, further additional investments to achieve the EU s broader environmental objectives are evaluated to be in the range of EUR 100 150 billion per year. In order to close these investment gaps, the financial sector has to play a key role in re-orienting flows to support the transition towards a more SUSTAINABLE economy. However, such reorientation of capital flows requires a common understanding among all investors, financial institutions, and companies across the EU of what a SUSTAINABLE investment is.

9 As a result, a unified EU-wide classification system ( the EU taxonomy ) for SUSTAINABLE economic activities was established to steer green investments towards those activities that are essential to achieving the European Green Deal objectives. The EU taxonomy creates an operational list of economic activities with TECHNICAL screening criteria , which determine in determining in which cases each economic activity makes a substantial contribution to an environmental objective. In this way, the EU taxonomy inter alia: 2 A European Green Deal | European Commission ( ) 8 creates a uniform and harmonised classification system providing a common language for investors, companies, policymakers, and financial institutions about what is considered an activity which makes substantial contribution to an environmental objective; creates transparency as well as security on environmental sustainability for investors and helps to shift investments where they are most needed; protects private investors from greenwashing; helps companies to become taxonomy-aligned; mitigates further market fragmentation and barriers to cross-border capital flows by applying a single, unified taxonomy system instead of different taxonomies across the Member States.

10 Provides the basis for further policy development in SUSTAINABLE finance, including standards, labels, and any potential changes to prudential rules. 3. Taxonomy approach explained The European Commission will adopt the EU taxonomy as a series of delegated acts under the Taxonomy Regulation, based on advice from external experts from the public and private sectors and on the basis of a transparent process with the involvement of stakeholders, using robust methodologies and scientific evidence. For this purpose, as required by the Taxonomy Regulation, the European Commission has set up a PLATFORM on SUSTAINABLE Finance (PSF), which is a new expert group that replaces the TECHNICAL Expert Group (TEG) and advises the European Commission on further developing the taxonomy. This section explains the elements applied in the further development of the EU taxonomy. It sets out the requirements and principles used by the PSF to assess which economic activities should be included in the taxonomy and under which conditions.