EU Taxonomy: New delegated acts expand the scope of covered sectors and activities

published on 25 July 2023 | Reading time approx. 2 minutes

With the publication of the delegated act on environmental objectives 3-6 on June 13, 2023, the requirements for taxonomy reporting increase even in the current reporting period. While reporting on the two climate objectives, “climate change mitigation” and “climate change adaptation”, has already posed a significant challenge for most companies, the implementation effort will further increase with the new environmental objectives and the additional consideration of the revised climate delegated act. We have compiled the most important information on the recent delegated acts for you.

After the long-awaited drafts of the new delegated acts were initially submitted by the EU for a four-week consultation in April, they were finally published on June 13, 2023, following a brief revision phase. Specifically, this includes the eagerly anticipated delegated act on environmental objectives 3-6 and an update to the existing climate delegated act, incorporating new activities and making some adjustments to existing ones. With this, the EU has achieved an important milestone in the gradual implementation of the EU Taxonomy, which serves as a classification system for “green” investments and is a core instrument of the Green Deal Action Plan on Sustainable Finance.

Delegated act on environmental objectives 3-6

The recently published delegated act provides a separate annex for each environmental objective, defining the economic activities falling under each objective and the corresponding technical screening criteria. In addition to the two climate objectives, “climate change mitigation” (environmental objective 1) and “climate change adaptation” (environmental objective 2), capital flows will now also be directed towards ecologically sustainable economic activities that significantly contribute to at least one of the following four environmental objectives:

Sustainable use and protection of water and marine resources (environmental objective 3)
Transition to a circular economy (environmental objective 4)
Pollution prevention and control (environmental objective 5)
Protection and restoration of biodiversity and ecosystems (environmental objective 6)

In addition to including new sectors such as services, disaster risk management, and accommodation activities, the delegated act adds new economic activities to sectors already addressed in the climate delegated act. This particularly affects the manufacturing sector. In addition to the CO2-intensive activities defined in the climate delegated act, activities such as the production of plastic packaging materials and the manufacturing of electrical and electronic devices have been included as activities that can make a significant contribution to the transition to a circular economy.

Amendment to the delegated climate act

Simultaneously with the publication of the technical screening criteria for environmental objectives 3-6, new economic activities were added to the climate delegated act, which already came into effect in 2021. The reason for this adjustment was that the initial version of the act prioritized the sectors and activities with the greatest potential to make a significant contribution to greenhouse gas emissions reduction (based on their share of total emissions and their theoretical potential for emission reduction). The EU explicitly emphasized at that time that this initial compilation of economic activities was not final and did not encompass all sectors and activities that could potentially make a significant contribution to climate objectives. It was therefore intended from the outset to gradually expand the scope of covered sectors. As a result, the amendment to the act adopted in June includes, for example, the manufacturing of automotive and mobility components, thereby addressing the long-standing demand to include automotive industry suppliers in the taxonomy. Additionally, the amendment includes specific adjustments to the technical screening criteria for existing activities.

When do the new delegated acts have to be taken into account in reporting?

The new delegated acts will come into effect on January 1, 2024. This means that reporting entities will be required to report on all six environmental objectives for the current financial year 2023. However, due to the short period between the publication of the recent delegated acts and their implementation, the legislator has provided certain simplifications for the first reporting period. The complete taxonomy reporting (taxonomy eligibility and taxonomy alignment) for all six environmental objectives will only be required starting from the fiscal year 2024. For the financial year 2023, companies will be required to disclose only the portion of revenue, investment, and operating expenses that are eligible according to the taxonomy for environmental objectives 3-6 and the newly added economic activities in the climate delegated act (see figure).

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Outlook: What do the new legal acts mean for reporting companies?

The new delegated acts have significantly expanded the range of sectors and economic activities covered by the EU taxonomy and further increased the implementation effort. Especially companies whose economic activities have not yet been included in the EU taxonomy so far should focus on carefully screening the latest delegated acts in order to be able to deal with the requirements and technical screening criteria of newly included activities in good time. In this regard, it is important to note that an economic activity listed in the taxonomy does not necessarily have to be revenue-generating – investment and operating expenses are also taxonomy-relevant and must be analyzed in detail for their taxonomy eligibility and alignment, regardless of revenue activities. Due to the short time remaining until the mandatory application of the new delegated acts, the analysis should be started as soon as possible and corresponding processes, IT systems and control mechanisms should be set up or adapted to the new requirements. Nevertheless, the new legal acts also open up opportunities for companies that have not or hardly been affected by the EU taxonomy so far. In the future, they too will be able to benefit on the capital market from the better financing conditions that can be expected for companies with a high proportion of taxonomy-aligned activities, provided that they organize their economic activities in a sustainable manner in line with EU taxonomy.