ESG – the Commission consults on Level 2 climate change measures

On 20 November 2020, the European Commission published the draft text of a Delegated Regulation setting out Level 2 measures under the Taxonomy, or Framework, Regulation (the Regulation) together with two accompanying Annexes.

Background to the consultation

The Regulation establishes the framework for the EU taxonomy by setting out four conditions that an economic activity must meet for it to qualify as 'environmentally sustainable'.

These are that it must:

1. contribute substantially to one or more of the six environmental objectives set out in Article 9 of the Taxonomy Regulation, namely:

   • climate change mitigation;
   • climate change adaptation;
   • the sustainable use and protection of water and marine resources;
   • the transition to a circular economy;
   • pollution prevention and control;
   • the protection and restoration of biodiversity and ecosystems

2. not significantly harm any of the other environmental objectives above in a way specified under Article 17

3. be carried out in compliance with minimum (social) safeguards set out in Article 18 of the Regulation and

4. comply with technical screening criteria (TSC) to be established by the Commission and which specify the performance criteria for a specific economic activity that determine under what conditions the activity

   • makes a substantial contribution to a given environmental objective; and
   • does not significantly harm the other objectives.

What does the proposed Delegated Regulation cover?

The Delegated Regulation, which builds on the recommendations made by the Commission's Technical Expert Group on Sustainable Finance, specifies the TSC for determining

• which specific economic activities qualify as contributing substantially to (a) climate change mitigation and (b) climate change adaptation and
• whether those economic activities cause significant harm to any of the other relevant environmental objectives.

The draft measures in relation to climate change mitigation (under Article 10(3)) are set out in Annex I and group the economic activity into the following categories

• Agriculture / forestry
• Environmental protection and reforestation activities
• Manufacturing
• Energy
• Water supply, sewerage, waste management and remediation
• Transport
• Construction and real estate activities
• Information and communication and
• Professional, scientific and technical activities

The draft measures in relation to climate change adaptation (under Article 11(3)) can be found in Annex II.  These use the same categories as Annex I above but with the addition of

• Financial and insurance activities
• Education
• Human health and social work activities and
• Arts, entertainment and recreation

What happens next?

The consultation period closes on 18 December 2020.

The Commission must formally put forward the final draft text of a Delegated Regulation by 31 December 2020 and this must then be agreed with the European Parliament and the Council of the EU.

The final agreed text will be published and will apply from 1 January 2022.