EU: Taxonomy rules – Fostering sustainable climate change mitigation/adaptation
The European Council approved, on 9 December 2021, its Delegated Regulation (EU) 2021/2139 of 4 June 2021 ('the Delegated Regulation'). In particular, the Delegated Regulation establishes technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or adaptation, and for assessing whether that economic activity causes no significant harm to any of the other environmental objectives. The Delegated Regulation entered into effect on 1 January 2022. OneTrust DataGuidance provides an overview of the Delegated Regulation.
The EU taxonomy is a classification system, featuring a list of environmentally sustainable economic activities. Regulation (EU) 2020/852 ('the Taxonomy Regulation') entered into force on 12 July 2020 and provides four overarching conditions that an economic activity has to satisfy in order to qualify as environmentally sustainable. Specifically, the activity must:
- contribute substantially to one or more of the six environmental objectives (outlined below);
- do no significant harm to any of the other environmental objectives;
- be carried out in compliance with minimum (social) safeguards set out in the Taxonomy Regulation; and
- comply with technical screening criteria established by the European Commission through delegated acts.
The six environmental objectives outlined by the Taxonomy Regulation are as follows:
- 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; and
- the protection and restoration of biodiversity and ecosystems.
Importantly, the European Commission ('the Commission') clarified that the taxonomy is meant to assist the EU in achieving its climate and energy targets for 2030 and in reaching the objectives of the European Green Deal. Furthermore, the Commission explained that the EU taxonomy provides companies, investors, and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable.
The Delegated Regulation
The Delegated Regulation was adopted in order to implement the Taxonomy Regulation, which provides the general framework for determining whether an economic activity qualifies as environmentally sustainable for the purposes of establishing the degree to which an investment is environmentally sustainable.
In particular, the Delegated Regulation outlines that Articles 10(3) and 11(3) of the Taxonomy Regulation require the Commission to adopt Delegated Acts establishing the technical screening criteria to assess the conditions under which a specific economic activity qualifies as contributing substantially to climate change mitigation or adaptation, respectively, while also setting up, for each relevant environmental objective laid down in Article 9 of the Taxonomy Regulation, technical screening criteria to determine whether that economic activity causes no significant harm to one or more of those environmental objectives.
Technical screening criteria
The technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation, as well as adaptation, and for determining whether that economic activity causes no significant harm to any of the other environmental objectives laid down in Article 9 of the Taxonomy Regulation, are set out in Annex I and II to the Delegated Regulation (Articles 1 and 2 of the Delegated Regulation).
The Delegated Regulation establishes screening testing criteria for mitigation in a number of areas including:
- water supply, sewerage, waste management, and remediation;
- construction and real estate activities;
- information and communication; and
- professional, scientific, and technical activities.
Adaptation, on the other hand, outlines the same areas as listed above with the inclusion of:
- financial and insurance activities;
- human health and social work activities; and
- arts, entertainment, and recreation.
Below please see the requirements associated with data processing, hosting, and related activities, as outlined in Section 8.1 of Annex I and II.
Information and communication
Data processing, hosting, and related activities are defined as the storage, manipulation, management, movement, control, display, switching, interchange, transmission, or processing of data through data centres, including edge computing.
Data processing, hosting, and related activities (Mitigation)
In order to satisfy the substantial contribution to climate change mitigation, the Delegate Regulation stipulates that the activity must implement all relevant practices listed as 'expected practices' in the most recent version of the European Code of Conduct on Data Centre Energy Efficiency, or in CEN-CENELEC's document CLC/TR50600-99-1 'Data centre facilities and infrastructures - Part 99-1: Recommended practices for energy management'. The implementation of those practices must be verified by an independent third-party and audited at least every three years. Importantly, where an expected practice is not considered relevant due to physical, logistical, planning, or other constraints, an explanation of why the expected practice is not applicable or practical must be provided. Alternative best practices from the European Code of Conduct on Data Centre Energy Efficiency or other equivalent sources may be identified as direct replacements if they result in similar energy savings. Furthermore, the global warming potential of refrigerants used in the data centre cooling system cannot exceed 675.
In relation to the 'do no significant harm' requirement, the Delegated Regulation states that the activity must comply with the criteria set out in Appendixes A and B of Annex I, in relation to climate change adaptation, and sustainable use and protection of water and marine resources, respectively. Moreover, the equipment used must meet the requirements laid down in Directive 2009/125/EC for servers and data storage products.
For transitions to circular economy, the Delegated Regulation outlines specific requirements about the equipment that can be used. For example, the Delegated Regulation prohibits the use of equipment contained in the restricted substances listed in Annex II to Directive 2011/65/EU, except where the concentration values by weight in homogeneous materials do not exceed the maximum values listed in that Annex. Furthermore, the Delegated Regulation requires a waste management plan to be in place and ensure the maximal recycling at the end of the life of electrical and electronic equipment, including through contractual agreements with recycling partners, reflection in financial projections, or official project documentation. Lastly, at its end of life, the equipment must undergo preparation for reuse, recovery, recycling operations, or proper treatment, including the removal of all fluids and a selective treatment in accordance with Annex VII to Directive 2012/19/EU.
Data processing, hosting, and related activities (Adaptation)
In order to satisfy the substantial contribution to climate change adaptation, the Delegated Regulation stipulates that the economic activity must be implemented into physical and non-physical solutions ('adaptation solutions'), that substantially reduce the most important physical climate risks that are material to that activity.
In addition, the Delegated Regulation states that the physical climate risks that are material to the activity must be identified from those listed in Appendix A to Annex II by performing a robust climate risk and vulnerability assessment with the following steps:
- screening of the activity to identify which physical climate risks from the list in Appendix A to Annex II may affect the performance of the economic activity during its expected lifetime;
- where the activity is assessed to be at risk from one or more of the physical climate risks listed in Appendix A to Annex II, a climate risk and vulnerability assessment to assess the materiality of the physical climate risks on the economic activity; and
- an assessment of adaptation solutions that can reduce the identified physical climate risk.
Moreover, the climate risk and vulnerability assessment is proportionate to the scale of the activity and its expected lifespan, such that:
- for activities with an expected lifespan of less than ten years, the assessment is performed, at least by using climate projections at the smallest appropriate scale; and
- for all other activities, the assessment is performed using the highest available resolution, state-of-the-art climate projections across the existing range of future scenarios consistent with the expected lifetime of the activity, including, at least, ten-to-30-year climate projections scenarios for major investments.
Further to the above, the Delegated Regulation provides that the climate projections and assessment of impacts are based on best practice and available guidance, and that they take into account the state-of-the-art science for vulnerability and risk analysis and related methodologies in line with the most recent intergovernmental panel on climate change reports, scientific peer-reviewed publications, and open source or paying models.
Finally, the Delegated Regulation establishes the adaptation solutions to be implemented, namely:
- not adversely affecting the adaptation efforts or the level of resilience to physical climate risks of other people, nature, cultural heritage, assets, and other economic activities;
- favouring nature-based solutions or relying on blue or green infrastructure to the extent possible;
- showing consistency with local, sectoral, regional, or national adaptation plans and strategies;
- monitoring and measuring against pre-defined indicators and considering remedial action where those indicators are not met; and
- where the solution implemented is physical and consists in an activity for which technical screening criteria have been specified in Annex II, the solution complies with the' do no significant harm' technical screening criteria for that activity.
In relation to the 'do no significant harm' component, the Delegated Regulation stipulates that for climate change mitigation, the activity must demonstrate best efforts to implement the relevant practices listed as 'expected practices' in the most recent version of the European Code of Conduct on Data Centre Energy Efficiency, or in CEN-CENELEC document CLC TR50600-99-1 'Data centre facilities and infrastructures - Part 99-1: Recommended practices for energy management', while also having implemented all expected practices that have been assigned the maximum value of five according to the most recent version of the European Code of Conduct on Data Centre Energy Efficiency.
For sustainable use and protection of water and marine resources, the activity complies with the criteria set out in Appendix B to Annex II.
Moreover, the requirements to satisfy the transition to a circular economy under the substantial contribution to climate change adaptation, are the same as listed above for the substantial contribution to climate change mitigation.
The Delegated Regulation represents the first Delegated Act implementing the Taxonomy Regulation, allowing for the commencement of the first two climate objectives. Moreover, the Delegated Regulation will enable companies to begin reporting based on the taxonomy. In this way, the Commission stated that the taxonomy aims to:
- create security for investors;
- protect private investors from greenwashing;
- help companies to become more climate-friendly;
- mitigate market fragmentation; and
- help shift investments where they are most needed.
Keshawna Campbell Lead Privacy Analyst