European Commission Releases New FAQ on EU Taxonomy and DNSH Criteria
On 2nd December 2024, the European Commission released updated FAQs on the EU Taxonomy, providing key clarifications on compliance and the "Do No Significant Harm" (DNSH) principle. The updates highlight the importance of regular audits, the integration of European Sustainability Reporting Standards (ESRS), and independent data verification. These changes aim to improve transparency and help companies and investors navigate the taxonomy more effectively.
On 2nd December 2024, the European Commission released updated guidance on the EU Taxonomy — a classification system for determining sustainable economic activities. The document includes a new FAQ and important clarifications regarding minimum safeguards and the "Do No Significant Harm" (DNSH) principle. These changes are designed to support investors and companies in applying the taxonomy and improve transparency in its use.
Download the European Commission’s EU Taxonomy FAQs to explore all the details and for further implementation.
Key Aspects of the EU Taxonomy
The EU Taxonomy is a key instrument within the EU’s Action Plan on Sustainable Finance. It classifies economic activities that contribute to one or more of the six environmental objectives:
- Climate Change Mitigation
Examples include projects that reduce greenhouse gas emissions, such as renewable energy and improving energy efficiency in industry and transport; - Climate Change Adaptation
This includes projects such as flood protection systems and infrastructure upgrades to increase resilience to extreme weather events; - Sustainable Use and Protection of Water and Marine Resources
For example, projects aimed at cleaning water bodies from pollutants and implementing technologies for efficient water use; - Transition to a Circular Economy
Projects such as recycling, waste management, and the development of circular business models that minimise resource use and waste generation; - Pollution Prevention and Control
Activities that reduce pollution, such as projects that lower emissions of harmful substances into the air, water, and soil, improving overall environmental quality; - Protection and Restoration of Biodiversity and Ecosystems
This includes projects aimed at restoring habitats, protecting endangered species, and enhancing ecosystem services to ensure the long-term health of biodiversity.
The system has been operational since 2022 for the first two objectives, and from January 2024, it will cover the remaining four.
Minimum Safeguards in Light of OECD Guidelines Updates
The European Commission has clarified that, to be considered sustainable, organisations must apply the latest versions of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Additionally, the links to these documents in Article 18 of the taxonomy are dynamic, requiring companies to update their practices in line with international standards.
Organisations that meet the requirements of the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) are automatically deemed to comply with the minimum safeguards for sustainable activities.
Source: European Commission’s EU Taxonomy FAQs
The DNSH Principle: Transparency and Implementation
The "Do No Significant Harm" (DNSH) principle is central to ensuring the environmental sustainability of activities under the EU Taxonomy. It means that for an activity to be recognised as sustainable, it must:
- Substantially contribute to one of the environmental objectives
For example, a project focused on ecosystem restoration that enhances biodiversity in a polluted area; - Not cause significant harm to other environmental objectives
A project improving water quality should not pose risks to ecosystems during its implementation; - Comply with minimum safeguards and technical criteria
This can include using low-carbon technologies and adhering to human rights protection standards.
Key Clarifications on EU Taxonomy Compliance
The European Commission's recently updated FAQ provides essential clarifications on how companies can apply the EU Taxonomy and ensure compliance. These updates aim to streamline the process and reduce uncertainty for businesses seeking to align with the taxonomy’s environmental objectives.
General Requirements for Taxonomy Compliance
The updated FAQ outlines the fundamental requirements for companies aiming to comply with the EU Taxonomy. This includes the need for regular audits to ensure that activities align with the taxonomy's standards. Companies will also need to confirm their compliance through detailed reports, demonstrating how their activities meet the specified environmental criteria.
Connection with European Sustainability Reporting Standards (ESRS)
Another key clarification in the FAQ is the relationship between the EU Taxonomy and the European Sustainability Reporting Standards (ESRS). The document explains that data from ESRS reporting, such as ESRS E3 or ESRS E4, can be used to substantiate compliance with the “Do No Significant Harm” (DNSH) principles. This integration simplifies the process for companies already reporting under ESRS, making it easier to meet the taxonomy’s sustainability requirements.
Data Verification and Independent Assessment
The FAQ also emphasizes the importance of data verification, highlighting that independent assessments will be necessary for companies whose activities fall within the scope of the EU Taxonomy’s environmental goals. The frequency of these checks will depend on the type of business and the associated technical criteria. Regular independent verification ensures transparency and credibility in meeting sustainability objectives.
Conclusions
The updated guidance from the European Commission on the EU Taxonomy helps reduce uncertainty for companies and investors but leaves several challenges:
- Interpretation of Dynamic Links to International Standards
Companies are required to stay updated on changes to international guidelines, which may necessitate additional efforts in monitoring updates; - Frequency of Independent Assessments
Regular independent verification adds administrative and financial burdens for organisations; - Integration of ESRS Data
Companies using ESRS for reporting must find ways to integrate this data with EU Taxonomy requirements, which could be a complex process for larger organisations.
The European Commission highlights the importance of using updated methodologies and recommends that organisations actively seek clarification if any questions arise. This will help reduce risks and increase investor confidence.
