Application of the DNSH principle
principle to obtain Next Generation funds
Application of the DNSH principle for NGEU funding
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, as in order to be eligible for any of the calls for proposals that arise, it will be necessary to guarantee that no significant damage is caused to the environment.
Another noteworthy initiative is the so-called Green Taxonomy Regulation, which establishes the technical criteria by which a company can be considered environmentally sustainable. Its objective is to provide the different actors in the markets with a tool that allows them to commit to environmentally sustainable companies.
This regulation establishes that all organisations that are obliged to present non-financial information must report the extent to which their economic activities “substantially contribute” to each of the six separate environmental objectives, corroborate that this activity does not cause any significant harm (DNSH) and ensure compliance with a series of good governance guidelines.
How do I know if I am complying with the DNSH principle?
To measure “substantial contribution”, companies will have to report on the proportion of turnover, operating expenditure (OPEX) and capital expenditure (CAPEX) that meet the technical selection criteria set out in the Regulation. Specifically, in 2022 companies will have to start reporting on climate change mitigation and adaptation targets in accordance with the delegated act of 4 June 2021.
In particular, this delegated act contains the technical selection criteria by which an economic activity can be considered to contribute substantially to the above-mentioned objectives and the criteria by which such economic activities do not cause significant harm to any of the other environmental objectives.
In summary, an economic activity is considered to cause significant harm when for each objective:
It results in significant GHG emissions
It leads to an increase in the adverse effects of current and projected future climatic conditions
It is detrimental to the good ecological status and potential of surface water bodies, groundwater or marine waters
leads to significant inefficiencies in the use of materials or natural resources or results in a significant increase in waste management or the disposal of waste which may cause significant harm to the environment
results in increased emissions of pollutants to air, water or land
would be detrimental to the good condition, conservation status of habitats and species and the resilience of ecosystems.
These six criteria of the Taxonomy Regulation are what the MRRF has adopted to ensure that each PRTR reform and investment complies with the principle of no significant harm. Member States are not required to refer to the technical screening criteria of the Taxonomy Regulation, but have the option of relying on these to assess compliance with the DNSH principle.
How do the DNSH criteria work?
The DNSH criteria established by the Taxonomy Regulation were designed under the condition of maintaining the legal minimum environmental standards set by the European Union and the Member States for each of the six objectives.
When the expected environmental impact is significant in an economic activity, but there are no specific requirements by current legislation, the expert group of the Sustainable Finance Platform then develops specific criteria. With this background approach, the DNSH principles come into play only when a given economic activity, beyond the substantial contribution to a given objective, presents a risk of significant harm to any of the other five objectives.
By way of example, where a given activity presents a risk of significant harm only to the circular transition and biodiversity objectives, the DNSH criteria will only be necessary for those two objectives; notwithstanding the fact that such activity complies with the minima legally established by the European Union and the Member States for the remaining objectives.
Currently, the Taxonomy Regulation has developed DNSH principles for economic activities that contribute substantially to climate change mitigation and adaptation objectives. It is under development for the remaining objectives. The final version for these four objectives is expected to be published by mid-2022.
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