Application of the DNSH principle to obtain NGEU Funds

In 2022 the European Commission is launching a series of initiatives with the aim of achieving a more sustainable European Union. The Next Generation Funds are a clear example of this, since in order to access any of the calls launched, it will be necessary to guarantee that no significant damage is caused to the environment.

Another notable initiative is known as the Green Taxonomy Regulation, which establishes the technical criteria by which a company can be considered environmentally sustainable. Its objective is to make it easier for the different actors in the markets to have a tool that allows them to put their stake on environmentally sustainable companies.

HOW CAN I KNOW IF I COMPLY WITH THE DNSH PRINCIPLE?

This regulation establishes that all organizations that are required to present non-financial information must report the extent to which their economic activities “substantially contribute” to each of the six environmental objectives separately, confirm that said activities do not cause any significant damage (DNSH) and guarantee compliance with a series of good governance guidelines.

To measure the “substantial contribution” companies must report on the proportion of business volume, operating expenses (OPEX) and capital expenses (CAPEX) that meet the technical selection criteria established by the said Regulation. Specifically, in 2022 companies must begin reporting on climate change mitigation and climate change adaptation objectives in accordance with the delegated act of June 4, 2021.

In particular, this delegated act contains the technical selection criteria by which an economic activity can be considered as substantially contributing to the aforementioned objectives and the criteria by which those economic activities do not cause significant harm to any of the other environmental objectives.

Briefly, an economic activity is considered to cause significant harm when for each objective:

  • Gives rise to considerable GHG emissions
  • Causes an increase in the adverse effects of current weather conditions and those expected in the future;
  • Is detrimental to the good condition and ecological potential of surface water bodies, groundwater, or marine waters;
  • Generate significant inefficiencies in the use of materials or natural resources or lead to a significant increase in waste management or the disposal of these may cause significant harm to the environment;
  • Give rise to an increase in polluting emissions into the atmosphere, water or soil;
  • Is detrimental to the good conditions, the conservation status of habitats and species and the resilience of ecosystems;

These six criteria of the Taxonomy Regulation are those that the MRR has adopted to guarantee that each reform and investment of the PRTR complies with the principle of not causing significant harm. Member States are not required to refer to the technical selection criteria of the Taxonomy Regulation, but have the option to rely on them to assess compliance with the DNSH principle.

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HOW DO DNSH CRITERIA WORK?

The DNSH criteria established by the Taxonomy Regulation were designed under the condition of maintaining the legal minimums established by the European Union and the Member States in environmental matters for each of the six objectives.

When the expected environmental impact is significant as a result of an economic activity, but there are no specific requirements by current legislation, the group of experts of the Sustainable Finance Platform then develops a specific criterion. With this underlying approach, the DNSH principles come into play only when a certain economic activity, beyond the substantial contribution to a given object, presents a risk of significant damage to any of the remaining five objectives.

As an example, where a given activity poses a risk of causing significant harm only to the circular transition and biodiversity objectives, the DNSH criteria will only be necessary for those two objectives; notwithstanding that said activity complies with the minimum legally established by the European Union and the Member States for the remaining objectives.

Currently, the Taxonomy Regulation has developed the DNSH principles for economic activities that contribute substantially to the objectives of climate change mitigation and adaptation to climate change. The remaining objectives are under development. The final version for these four objectives is expected to be published by mid-2022.

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