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   European Union Taxonomy for Sustainable Activities (EUTSA)

 

  • Drafting and managing all European Union Taxonomy for Sustainable Activities (EUTSA)-related documents; EUTSA research, training and recommendation of EUTSA principles for United States (US) enterprise operations.  Although EUTSA and all various European Union (EU) frameworks are not widely-known or understood here in the US, EUTSA principles and reporting requirements may still be integrated into US enterprise corporate policies through various familiar and similar US corporate governance frameworks, such as corporate social responsibility (CSR) and environmental social governance (ESG).

 

  • In March of 2018, the European Commission (EC) had published the “Commission action plan on financing sustainable growth”, the purpose of which was to emphasize that the key to implementing the then-proposed “European Green Deal” (EGD), which was apparently inspired by, and intended to both emulate and amplify, the “Green New Deal” general framework of recommendations promoted by a US Congressperson in early May 2019, proposing that US public policy should address climate change, along with initiating statutes to achieve other social aims like creating jobs and reducing economic inequity.

 

  • The EGD has several familiar principles, such as: zero pollution in Europe; transition to a circular economy (CE – an idealized a model of production and consumption, which involves sharing, leasing, recycling, refurbishing, repairing, reusing and sharing whenever possible existing materials and products for as long as possible, in order to mitigate global challenges such as biodiversity loss, climate change, pollution and waste); farm to fork (a social-responsibility movement which promotes serving local food at restaurants and school cafeterias, preferably through direct acquisition from the producer, which could be accomplished by a community-supported agriculture arrangement, a direct sales relationship, a farmer's market, a local distributor or by the restaurant or school raising its own food); green common agricultural policy (CAP); inclusion of all socio-economic classes; socially-responsible green financing – such as promoted by the Corporate Sustainability Reporting Directive (CSRD), known formally as “Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (Text with EEA relevance)”, which became effective on January 1, 2023, and is applicable to more than 50,000 EU companies (generally, those with more than 500 employees); affordable, clean and reliable energy; climate neutrality (net-zero CO2 emissions); sustainable transportation (such as electric vehicles – EVs); preserving Europe’s natural resources.

 

  • The EC apparently felt that the key to promoting the EGD would be to concentrate on developing the concept of “sustainable development” (which the EC defined generally as conserving, and efficient use of, available resources to meet the needs of the present population, while simultaneously ensuring that future generations will have adequate resources to meet their own needs), and promoted the idea that the sustainable development concept was built on 3 pillars: economic; environmental; and, social.  Although the concept of sustainable development had been around for many years, it first gained global prominence through the United Nations (UN) 2015 Paris Agreement, which is a legally-binding international treaty concerning climate change, adopted by 196 attendees at the UN Climate Change Conference (COP21) in Paris, France, on December 12, 2015, and became effective on November 4, 2016.  The main provision of which stressed the need to  limit the increase in the global average temperature to well-below 2°C above pre-industrial levels, and endeavor to limit the global average temperature increase to no more than 1.5°C above pre-industrial levels.

 

  • The EGD philosophy also incorporated the spirit of the 17 aspirational sustainable development goals published by the UN in 2015 in conjunction with the 2015 Paris Agreement: (1) no poverty; (2) zero hunger; (3) good health and well-being; (4) quality education; (5) gender equality; (6) clean water and sanitation; (7) affordable and clean energy; (8) decent work and economic growth; (9) industry innovation and infrastructure; (10) reduced inequalities; (11) sustainable cities and communities; (12) responsible consumption and production; (13) climate action; (14) improvement of life below water; (15) improvement of life on land; (16) peace, justice and strong institutions; and, (17) formation of co-operative partnerships to achieve the aforementioned aspirational goals.

 

  • So in 2020, the European Commission (EC) adopted the EGD set of proposals. The EC apparently felt that climate change and environmental degradation were an existential threat to Europe and to the world, and so the EGD was necessary to reduce net emissions of greenhouse gases (GHGs) to zero (represented in the catch-phrase “net-zero”) by 2050, and to concentrate on increasing economic growth while simultaneously reducing dependence upon fossil fuels (such as oil, gas and nuclear) through the increased use of renewable energy sources (such as biomass, solar, tidal and wind)thus benefitting all people on the planet by addressing their “energy poverty”.

 

  • Concurrent with the initiation of the EGD, the EC also published in 2020 the EU Taxonomy for Sustainable Activities (EUTSA) – known informally as “Regulation (EU) 2020/852 (Taxonomy)” – under Article 114 of the Treaty on the Functioning of the European Union (TFEU).  “Taxonomy” is a term meaning some sort of system for classifying something (here, a classification for recommendations that might hopefully someday become actual EU laws).  The point of the EUTSA was to clarify which activities might be considered under general EU consensus to be investments that may be environmentally sustainable, in the context of the European Green Deal, and that might pre-empt accusations of “greenwashing” (dissemination of misleading information that conceals abuse of the environment in order to present a positive public image), due to such general EU consensus, and thus might assist average investors unfamiliar with the concept of sustainable (green) development in making more-informed choices about “green investments” (investments which are “socially-responsible”, meaning those investments that may result in a favorable impact on the environment, under environmental social governance – ESG – principles). The EUTSA then, is really just a complex framework, designed by the EU to classify which aspects of the EU economy (and eventually perhaps, the world economy) the EU may feel comfortable endorsing and marketing as sustainable (green) investments.

 

  • The actual EUTSA Regulation, entitled formally “Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (Text with EEA relevance)” became effective on July 12, 2020, and defines 6 sustainability conditions precedent (generalized from the 17 UN aspirational sustainable development goals) with which an economic activity within the EU must comply, in order to be classified as a sustainable investment, as follows: (1) climate change mitigation; (2) climate change adaptation; (3) the sustainable use and protection of water and marine resources; (4) promoting the transition to a circular economy; (5) pollution prevention and control; and, (6) the protection and restoration of biodiversity and ecosystems.  It is important to understand that for an activity to qualify as sustainable, it must “do no significant harm” (DNSH) to any of the 6 conditions precedent above. For each proposed activity, technical screening criteria (TSC) lay out thresholds to define DNSH compliance, and define the specific requirements and thresholds for an activity to be considered as significantly-contributing to a condition precedent sustainability objective. These TSC are further refined in secondary legislation called Delegated Acts (DAs).

 

  • The first DA – entitled “Climate Delegated Act” – under the EUTSA became effective on January 1, 2022, and had the aim of supporting sustainable investment by making it clearer which economic activities most contribute to meeting the EU’s environmental objectives.  On February 2, 2022, the EC published the Taxonomy Complementary Climate Delegated Act, the second act published under the EUTSA – formally entitled, “EU taxonomy: Complementary Climate Delegated Act to accelerate decarbonisation” – which was aimed at classifying certain gas and nuclear activities that could be added as transitional activities to those already covered by the first Delegated Act on climate mitigation and adaptation. 

 

  • Within the activities that substantially contribute to one or more of the sustainability conditions precedent, EUTSA also defines 2 sub-classification categories: enabling activities; and, transitional activities. These were added to allow activities which may not otherwise have been considered sustainable to contribute to the overall objective of promoting sustainability. Enabling activities allow other activities to make a substantial contribution to one or more of the sustainability conditions precedent. However, enabling activities must not perpetuate the use of fossil –based energy sources, which would undermine long-term sustainability goals. They must maintain a substantial positive environmental impact over the activity’s lifecycle.  Transitional activities must contribute to climate change mitigation and be consistent in keeping climate change in line with Paris Agreement commitments. Transitional activities only qualify as sustainability conditions precedent if the following criteria are met: there are no technological or economically-feasible low-carbon alternatives; GHG emission levels are consistent with the best performance of other alternatives in the particular application; and, the activity does not perpetuate the use of fossil-based energy sources or does not hamper the development and deployment of low-carbon alternatives.

 

  • A Delegated Act supplementing Article 8 of the EUTSA – formally entitled “Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation (Text with EEA relevance)” – was published by the EC on December 10, 2021 became effective on January 1, 2022, and specifies the content, methodology and presentation of information to be disclosed by financial and non-financial undertakings concerning the proportion of environmentally sustainable economic activities in their business, investments or lending activities.

 

  • As with any EU Regulation, the EUSTA requires onerous disclosure and reporting.  The EUSTA requires certain entities to disclose information concerning the degree of alignment of their activities with EUSTA principles. This required amending the disclosure requirements in the EU’s Non-Financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR).  Regarding the NFRD disclosure, any undertaking subject to the NFRD needs to disclose how, and to what extent, its activities are associated with activities that are considered as environmentally sustainable under EUSTA. Non-financial undertakings will need to disclose: the proportion of turnover (meaning the totals of invoices during some reference period) derived from the EUSTA-related; and, the proportion of the capital expenditure and operating expenditure for such activities associated with EUSTA-related activities.  Such disclosure is known as Article 8 disclosure and also applies to the expanded list of potential eligible entities in the EU’s new proposal for a Corporate Sustainability Reporting Directive (CSRD), which is a task similar in philosophy to the corporate social responsibility (CSR) framework practiced by some enterprises here in the United States (US), which is a predecessor to the currently-popular environmental social governance (ESG) framework within many US enterprises.

 

  • Entities subject to the SFDR disclose requirements must report on the alignment of their products with the EUSTA requirements. Such disclosure covers products that have both those with environmental or social characteristics – designated as Article 8 SFDR products – and those with sustainable investment as their ultimate objective – designated as Article 9 SFDR products.  Such disclosures are known as Article 5 Taxonomy disclosure and Article 6 Taxonomy disclosure. Any such disclosure will cover how and to what extent the investments underlying the financial product are in economic activities that qualify as environmentally sustainable under the EUSTA.  For financial products that do not do not consider the EU criteria for environmentally sustainable economic activities, a subject entity must state so in its disclosure, which is known as Article 7 Taxonomy disclosure.

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