On 21 November 2023 and following extensive consultation periods, the amendment to the Climate Delegated Act (Delegated Regulation (EU) 2021/2139 of 4 June 2021) (the Climate Delegated Act) was formally adopted by the European Commission and published in the EU Official Journal (Delegated Regulation (EU) 2023/2485 of 27 June 2023) (the Climate Delegated Act Amendment).
What is the EU Taxonomy?
The EU Taxonomy is a classification system that establishes a list of environmentally sustainable economic activities. It was introduced in recognition of the need to access private capital to support the transition to a low-carbon economy. The criteria prescribed by the EU Taxonomy Regulation (EU) 2020/852 (the Taxonomy Regulation) are intended to encourage investor confidence that investments will have a positive environmental impact. Article 9 of the Taxonomy Regulation sets out some environmental objectives: an economic activity must meet at least one of these to qualify as environmentally sustainable.
These are:
- 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.
It then provides that economic activities can be included within the Taxonomy Regulation as “environmentally sustainable” if they respect four overarching conditions (Article 3), namely they:
- make a substantial contribution to one or more of the six environmental objectives above;
- do no significant harm to any of the other environmental objectives;
- are carried on in compliance with certain safeguards (such as compliance with certain international human rights and labour standards); and
- comply with the technical screening criteria set out in delegated legislation to the Taxonomy Regulation.
Enabling versus Transitional activities
To contribute to the overall objective of promoting sustainability, the Taxonomy Regulation introduces the concept of “enabling activities” and “transitional activities”.
Enabling activities are those activities that contribute substantially to one or more of the environmental objectives provided certain conditions are met.
The main shipping-related enabling activities which have been included in the Taxonomy Regulation are the “construction, modernization, operation and maintenance of infrastructure that is required for zero tailpipe CO2 operation of vessels or the port’s own operations, as well as infrastructure dedicated to transshipment” (Section 6.16 of Annex 1 of the Climate Delegated Act (as amended by the Climate Delegated Act Amendment)).
The European Commission has noted that, at present, the ability of the shipping industry to make a substantial contribution to climate change mitigation is technologically constrained and so most other shipping activities do not qualify as “enabling activities”.1 The European Commission has however recognized that the shipping industry has the potential to play a significant role in reducing carbon emissions and has therefore agreed to include certain shipping activities within a separate category of “transitional activities”.
Transitional activities relate only to the climate change mitigation objective and are defined as those economic activities in industries such as shipping, for which there is no technologically and economically feasible low-carbon alternative but which may still be considered as making a substantial contribution to climate change mitigation for the Taxonomy Regulation provided that the activity:
- has greenhouse gas emission levels that correspond to the best performance in the sector or industry;
- does not hamper the development and deployment of low-carbon alternatives; and
- does not lead to a lock-in of carbon-intensive assets considering the economic lifetime of those assets.
By including certain shipping activities within the framework of the Taxonomy Regulation as transitional activities, the European Commission is hoping to support the transition to zero-emissions vessels, including R&D on alternative technologies, fuels, and infrastructure.
Extension of criteria
The original set of technical screening criteria was published in the Climate Delegated Act in 2021. The European Commission consulted with various stakeholders on amendments to this, leading to the finalization and publication of the Climate Delegated Act Amendment.
The changes made to Section 6.10 of Annex 1 (which sets out the technical screening criteria that would need to be complied with for the purchase, financing, leasing, rental, or operation of sea and coastal freight water transport vessels (or vessels for port operations and auxiliary activities)) are of key relevance to the shipping industry. These changes expanded the technical screening criteria for making a substantial contribution to climate change mitigation under Section 6.10 by adding two additional options for compliance, being:
(i) vessels that can run on zero direct (tailpipe) CO2 emission fuels or fuels from renewable sources, having an Energy Efficiency Design Index (EEDI) 20 % below EEDI requirements on 1 April 2022, provided they can plug-in at berth and where relevant, use state-of-the-art measures to mitigate methane slippage emissions; and
(ii) vessels with an Energy Efficiency Existing Ship Index (EEXI) 10% below the EEXI requirements on 1 January 2023 with yearly average greenhouse gas intensity not exceeding certain thresholds set out in Annex 1.
Before these changes, only vessels with zero direct (tailpipe) CO2 emissions would qualify, with a buffer period applying until the end of 2025 to allow limited direct emissions, subject to the vessel’s use.
The addition of these options widens the scope for the type of vessels that can potentially qualify as taking part in transitional environmentally sustainable economic activities. In particular, under the second additional option introduced, more vessels running entirely on fossil fuel (without alternative fuel capability) could potentially benefit, although it is worth noting that vessels that are dedicated to the transport of fossil fuels are still excluded. These additional options apply from 1 January 2026 and there is no time limit on their application.
Why does this matter?
In addition to providing greater clarity as to what projects can be described as sustainable, the Taxonomy Regulation also performs a regulatory function.
CSRD – the corporate sustainability reporting directive
The corporate sustainability reporting directive (CSRD), which entered into force in the EU on 5 January 2023, has expanded the ambit of entities required to provide certain non-financial information as part of their annual reporting. As such, this requirement will now apply to (amongst others):
- all companies listed within the EU (including listed public interest SMEs);
- unlisted large EU undertakings; and
- certain non-EU companies where their securities are admitted to trading on an EU-regulated market, they have EU subsidiaries that are large undertakings or public interest SMEs or EU branches which generate substantial turnover.
The date on which the reporting requirements will become applicable differs per kind of entity.
Companies subject to the CSRD disclosures will have to prepare their reports under the European Sustainability Reporting Standards (ESRS). The first set of standards was adopted in December 2023 and applies to all companies within the scope of CSRD. The legislation also foresees the development of sector-specific standards in due course; standards for the shipping sector are not yet under development.
Challenges and opportunities
For entities that fall within the scope of the CSRD to be able to provide accurate information in their annual reports as well as, in the case of financial institutions, an accurate GAR, they will need to gather information from their shipping customers. This may be relatively straightforward for large multinational shipping customers who are already under an obligation to comply with the CSRD disclosure requirements but will prove to be much more challenging for small to medium-sized shipping companies.
For further information regarding the CSRD reporting obligations please refer to the following articles:
The Corporate Sustainability Reporting Directive and its impact on EU and non-EU companies | Global law firm | Norton Rose Fulbright
EU Commission to delay adoption of rules under the Corporate Sustainability Reporting Directive | Deutschland | Global law firm | Norton Rose Fulbright
Shipowners, operators, and financiers will need to consider the implications of owning and financing vessels that do not fall within the Taxonomy Regulation criteria. For owners, this could mean limited or more expensive financing options as well as reputational risk through disclosures under CSRD. Financial institutions will also have to consider reputational risks through CSRD and/or GAR disclosures as well as the impact on their access to investor capital.
The additional screening criteria made available by the Climate Delegate Act Amendment represents an opportunity for some operators to align more of their fleet with the Taxonomy Regulation and potentially improve their reputation and access to ‘green’ capital. The same can be said for financiers with exposure to such owners. The Climate Delegate Act Amendment could also have an impact on newbuild orders and second-hand purchases, with owners now having the option of sticking to more conventional fuel vessels that fall within the Taxonomy Regulation criteria. In addition to being cheaper, this could be particularly attractive for owners and financiers who are uncertain on which alternative fuel technology to invest in at this stage.
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Source: Nortonrosefullberight
