Extending the EU's taxonomy - an update on current consultations

The European Commission’s Platform on Sustainable Finance (PSF) has published a series of consultations and reports in the past few weeks.

The PSF was established by the Commission to provide advice on developing the EU taxonomy, set out in the Taxonomy Regulation (TR) and, in particular, on the development of technical screening criteria (TSC) for the six environmental objectives set out in the TR:

1. climate change mitigation;
2. climate change adaptation;
3. sustainable use and protection of water and marine resources;
4. transition to a circular economy;
5. pollution prevention and control; and
6. protection and restoration of biodiversity and ecosystems.

(Note that none of the PSF’s documents described below constitutes an official Commission consultation - they neither commit the Commission to any particular position nor do they preclude any policy outcomes.)

The August Draft Report

On 3 August 2021, the PSF published a draft report, "Taxonomy pack for feedback" (the Draft Report) for consultation, together with an Annex, "Full list of Technical Screening Criteria. August 2021".

The Draft Report focuses primarily on presenting a first set of priority economic activities and draft recommendations for associated 'substantial contribution' and 'do no significant harm' (DNSH) TSC in relation to the four non-climate environmental objectives (ie water, circular economy, pollution prevention, and biodiversity & ecosystems).

However, it also includes some draft recommendations for TSC related to the climate change mitigation and climate change adaptation objectives.

The consultation period runs to 24 September 2021. The PSF intends to submit its final Taxonomy Report to the Commission ‘by November 2021’.

Developing a social taxonomy

The Draft Report follows hard on the heels of two other PSF documents, published on 12 July 2021, namely:

• a consultation paper on ‘Taxonomy extension options linked to environmental objectives’; and
• a draft report, 'Social Taxonomy' (the July Draft Report).

The consultation paper (which the PSF describes as a ‘work in progress’) seeks feedback on the possibility of extending the EU Taxonomy so significantly harmful (SH) activities and no significant impact (NSI) activities (both in relation to environmental sustainability) would fall within the overall framework of EU sustainable finance.

The July Draft Report looks at the structure for a social taxonomy and the relationship between the social and environmental taxonomies and the regulatory environment.

It identifies four key differences between a social and an environmental taxonomy and suggests a structure for a social taxonomy which is both vertical and horizontal.

• The vertical dimension focuses on products and services for basic human needs and basic infrastructure – so, economic activities that make such products and services more accessible, while doing no harm to efforts to achieve other social objectives, could be considered social.
• The horizontal dimension takes into account impacts on different groups of stakeholders affected by economic activities – workers, including value chain workers, consumers and communities. Accordingly, horizontal objectives would be likely to include a combination of entity- and activity-level criteria, crucial for ensuring businesses’ respect and support for human rights as part of the social taxonomy.

Comments can be made in respect of the consultation and July Draft Report until 6 September 2021 (extended from the original closing date of 27 August 2021), with the PSF due to submit its final advice to the Commission in autumn 2021.

The Commission is then expected to adopt a report on the potential extension of the taxonomy framework by the end of 2021.