Development of the EU sustainable finance taxonomy: a framework for defining substantial contribution for environmental objectives 3-6

The European Union has introduced a new policy tool to define which investments can be considered environmentally sustainable: a taxonomy of environmentally sustainable economic activities (the 'EU taxonomy'). Regulation (EU) 2020/852 of the European Parliament and the Council (the 'Taxonomy Regulation'), establishes the framework for its development and use. It empowers the European Commission to define the actual taxonomy, i.e. the list of economic activities and associated technical screening criteria setting out the required level of environmental performance. This list of economic activities and the accompanying technical screening criteria will be adopted in delegated acts. The first delegated act2 has been already adopted. It defines technical screening criteria for activities making a substantial contribution to climate change mitigation and adaptation. A future delegated act will define the technical screening criteria for economic activities making a substantial contribution to the four remaining environmental objectives: Sustainable use and protection of water and marine resources; Transition to a circular economy; Pollution prevention and control and Protection and restoration of biodiversity and ecosystems. However, limited literature exists in sustainable finance for defining environmental performance thresholds at economic activity level for these environmental objectives. This report proposes a methodological framework and a step-by-step process to draft criteria for economic activities substantially contributing to the four remaining environmental objectives. From the identification of the type of substantial contribution the economic activity can make, the selection of the most suitable approach to draft the technical screening criteria and the setting of the level of ambition expected to consider that contribution substantial. The report then explores how the conceptual framework can be applied in practice for each of the four environmental objectives. A key result from the framework is to define seven approaches for setting technical screening criteria and to assess their strengths and weakness. One such approach is, performance in relation to an environmental target, whereby an activity qualifies if it achieves a certain level of performance derived from existing targets. The methodological framework also considers the different nature of each environmental objective and thus establish different types of substantial contribution for ea