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August 2, 2023

UK urged to refine EU’s ‘do no significant harm’ approach in green taxonomy

Water shortages in Mexico. The DNSH criteria include the sustainable use and protection of water and marine resources (Photo: Marian Carrasquero/Bloomberg)
Water shortages in Mexico. The DNSH criteria include the sustainable use and protection of water and marine resources (Photo: Marian Carrasquero/Bloomberg)

Government advisory group backs adoption of DNSH criteria, but says improvements in clarity and usability are needed. Others say that under the EU system, businesses have been expected to ‘speak a language they didn’t know’.

The government’s Green Technical Advisory Group says the UK taxonomy should adopt criteria used by the EU linked to the “do no significant harm” principle but revise these where appropriate.

The UK was due to legislate for its own green taxonomy by the end of last year, which builds on existing taxonomies including that of the EU. In December, however, the government delayed the initiative’s introduction, citing its complexity.

A new GTAG report says the EU taxonomy’s DNSH criteria are “complex to navigate”, and it calls on the UK to adopt some of the EU “technical screening criteria” – which cover different environmental goals – but to revise other thresholds.

The principle of doing no significant harm is included in many taxonomies. Under EU rules, in order for an economic activity to be considered environmentally sustainable, it must do no significant harm to six environmental objectives set out within the taxonomy. These are climate mitigation; climate change adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems.

GTAG said its analysis revealed that implementation of the DNSH criteria as drafted in the EU had been challenging, “due to the number of criteria which are inconsistent, overly repetitive, and difficult to measure and understand due to ambiguity in drafting”, adding: “There is also a lack of clarity on fundamental definitions such as ‘significant harm’.”

“Streamlining and flexibility are essential to keep reporting requirements linked to actual investment decision-making,” Fulcrum Asset Management’s director of climate-aligned investing Iancu Daramus told Sustainable Views.

The European Commission has been contacted for comment.

Nuanced approach

GTAG has made several recommendations to the government, which include defining DNSH in the forthcoming autumn consultation. The group also suggested a more nuanced approach to companies that are not fully aligned with the taxonomy.

In the EU, only activities that meet all DNSH criteria are considered DNSH-aligned. GTAG agreed with this approach but recommended that companies whose activities do not fully meet all requirements should be allowed to explain why. This would give the market valuable information not currently available under the EU’s approach.

“Allowing for partial taxonomy alignment will help broaden the investment universe and possibly reduce the risk that emerging markets are left behind,” Newton Investment Management’s global head of sustainable investment Therese Niklasson told Sustainable Views.

GTAG said the government should also prioritise quantitative thresholds. Any qualitative criteria should be accompanied by “detailed justifications”, while reference to domestic UK legislation should be omitted where possible, in order to help UK companies with international activities align with the taxonomy.

“It is fundamental that usability, which is an important goal, does not become a way to weaken DNSH criteria or to set them aside. We are always concerned about that risk,” said Henry Eviston, sustainable finance policy officer at the WWF European Policy Office.  

“Some of the EU taxonomy’s DNSH criteria could sometimes be difficult to use,” he told Sustainable Views. 

He cited the requirement that companies disclose a project’s alignment with a regulation such as the Water Framework Directive, which contains measures and targets for countries, rather than criteria for single economic activities, which are what companies ultimately invest in. 

“This was a clear category error, which meant that businesses were being asked to speak a language they didn’t know, which made it difficult for them to make proper disclosures,” he said. 

“Furthermore, many criteria were not quantitative. In some cases this was justified, as data on objectives such as biodiversity sometimes just doesn’t exist yet – but greater attention could have been given to setting numerical thresholds, which would also have made disclosures easier.”

A service from the Financial Times