As the world looks to tackle climate change, businesses are under pressure to improve their environmental performance. Adopting strategies to reduce emissions, conserve water or switch to renewable energy seem like an obvious solution. But what if the measures you intend to implement negatively impact another environmental objective?
In order to cement sustainability within your strategy, for EU businesses it’s important to ensure that your business activities Do No Significant Harm (DNSH) to the environmental goals set out as part of the EU Taxonomy for Sustainable Activities.
To ensure your efforts have maximum effect in the move towards climate change mitigation, this article explores how to apply DNSH criteria – and how that is key to attracting future investment for sustainable success.
what is EU taxonomy?
As Europe presses ahead with its Green New Deal and sustainable finance initiatives, sustainability management and reporting are more important than ever. Key to this focus on green growth and investment is the EU’s Taxonomy for Sustainable Activities. This important classification system helps investors determine whether an economic activity is environmentally sustainable.
For those looking to invest sustainably, it highlights whether a company meets environmental standards and policy such as the Paris Agreement on climate change. For businesses, it can help to determine if their activities are climate-friendly with compliance helping them attract investment and scale up sustainable growth.
To determine whether activities are indeed sustainable, EU Taxonomy sets out six key environmental objectives that businesses should aim to address:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
understanding the DNSH principle
To establish Taxonomy alignment, you’ll need to demonstrate that your activities substantially contribute to one the six key objectives listed above. Crucially, however, you must also assert that they Do No Significant Harm to any of the other five objectives.
The primary goal here is to ensure that an activity, despite being environmentally advantageous, does not have adverse effects on other environmental objectives. This is important because in the past, it was not uncommon for an alleged solution to a sustainability problem to cause other problems or impair attainment of other targets.
Consider, for example, the “food versus fuel” dilemma, which is a prime illustration of this problem: the use of biomass as a biofuel, or for bio-based materials, stands in competition with crop cultivation for food production – and could potentially amplify the global hunger crisis. This is a classic example of conflicting goals.
applying DNSH criteria
One way of handling conflicting goals in the context of sustainability is the Do No Significant Harm principle. Using the following audit questions, can help you to establish whether your activities fulfill DNSH criteria according to the six EU Taxonomy objectives:
1 Climate change mitigation
- Could the measure lead to significant greenhouse gas emissions?
2 Climate change adaptation
- Will the measure amplify adverse effects of climate change?
- Will those effects affect the measure itself or people, nature or property?
3 Sustainable use and protection of water and marine resources
- Would it be safe to assume that the measure will damage the good environmental status or the good ecological potential of bodies of water?
4 Transition to a circular economy
- Could the measure lead to a significant increase in waste that requires treatment? (except for non-recyclable hazardous waste)
- Could it lead to significant inefficiencies in the use of resources? (e.g. due to reduced durability or operating time, reduced ability to dismantle, repair or retrofit, reduced recyclability or higher hazardous substance content)
- Could it result in significant or long-term environmental damage with reference to the circular economy?
5 Pollution prevention and control
Could it lead to a significant rise in the emission of hazardous substances into the air, water or ground or cause other environmental damage?
6 Protection and restoration of biodiversity and ecosystems
- Could the good status or resilience of ecosystems be significantly damaged?
- Could it damage the conservation status of habitats or species?
While evaluating the answers to these control questions, companies should consider each environmental goal separately.
how to conduct a DNSH assessment
To report effectively on DNSH criteria, you’ll need to conduct a two-step DNSH assessment.
In the first step, you will answer the questions for each of the environmental objectives as described above. If the answer to any of the questions is “no” and the activity is deemed to do no harm, then you will need to provide a brief justification.
This should illustrate why the objective does not require a substantive DNSH assessment, usually according to one of the following arguments:
- The measure has no or insignificant foreseeable impact on the environmental goal
- The measure is 100% trackable
- The measure makes a significant contribution to the environmental objective under the Taxonomy Regulation
If the answer to any of the DNSH audit questions is “yes”, then you should proceed to the second step where you will need to provide a substantive analysis and justification that your measures and actions contribute to one or more of the environmental objectives – without contradicting any of the other five objectives on the list.
If no justification is provided, the EU Commission may consider that the measure is associated with possible significant harm.
attracting sustainable investment
The EU Green Deal is targeting the financial sector's leverage to achieve the European Union's climate targets. Sooner or later, it is likely that your company will feel this leverage and will have to contribute to the green transformation. Sustainability, however, cannot be integrated into corporate strategy overnight. Optimizing existing strategy in terms of EU Taxonomy is usually a long-term undertaking, so it’s a good idea to start early!
By integrating DNSH concepts in a timely manner, you set the course for Taxonomy-alignment and comprehensive environmental, social and governance (ESG) reporting. Both can make or break your access to the financial market in the future. By evaluating your business activities based on DNSH principles, you can identify the potential to achieve sustainable economic success and in doing so, you’ll also contribute to the success of global sustainable development goals (SDGs).