On 30th March 2022, the European Commission’s Platform on Sustainable Finance published its final recommendations with respect to the four environmental objectives including the Transition to a Circular Economy.

What exactly is it, what sectors are included and what does it mean for both financial institutions and non-financial companies? More confusion or much-needed clarity on defining what circular economy actually is with respect to specific economic activities?

Background

First, a bit of background. It is the EU Commission’s ambition that by 2030 economic growth is decoupled from the extraction of non-renewable resources and the depletion of the stock of renewable resources is reversed. And by 2050 economic activity is largely decoupled from resource extraction, through environmental design for a circular economy to eliminate waste and pollution, keep materials and products in use at their highest value, and to regenerate ecosystems1.

This ambition builds on a reduction of the EU27 material footprint by 50% by 2030 and by 75% by 2050 and raising the circular material use rate of all materials to increase the average to at least 25% by 2030.

To achieve this, however, a common language, clearly defined criteria and quantifiable metrics need to be used across the EU to provide clarity on what defines the transition to a circular economy and how it should be measured. A taxonomy that defines the significant contribution to the transition to a circular economy is necessary to drive the transition both from the perspective of non-financial institutions but also to encourage investment into the circular transition.

Context

The EU Commissions Platform on Sustainable Finance is responsible for developing the Commission’s policies on sustainable finance and, notably, responsible for the development of the EU Taxonomy. As part of this responsibility, the Platform’s Technical Working Group published its final recommendations on March 30th, 2022, with respect to the four environmental objectives:

• The sustainable use and protection of water and marine resources
• The transition to a circular economy
• Pollution prevention & control
• The protection and restoration of biodiversity and ecosystems.

The recommendations outlined in the report will provide the substance for a second delegated act covering the aforementioned environmental objectives (following up on the first delegated to act on sustainable activities for climate change mitigation and adaptation which entered into force on 1 January 2022).

It is important to note that what has been published on 30th March is recommendations. However, it is expected that the recommendations will translate into a delegated act later this year with little deviation with respect to recommended targets, criteria etc.

How the Taxonomy works

For an economic activity to be aligned with the EU Taxonomy, it must:

• Substantially contribute to at least one of the six environmental objectives, as defined in the technical screening criteria;
• Do no significant harm to any of the other five environmental objectives, as defined in the technical screening criteria;
• Comply with minimum safeguards such as the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

So far, the technical screening criteria have been defined for the environmental objectives of climate change mitigation and climate change adaptation. The report published on March 30th outlines recommended technical screening criteria for the four environmental objectives.

Dig a little deeper into the Circular Economy Taxonomy:

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Defining substantial contribution to the transition to a circular economy

The Taxonomy Regulation (Art. 2) defines the circular economy as an economic system whereby the value of products, materials and other resources in the economy is maintained for as long as possible, enhancing their efficient use in production and consumption and thereby reducing the environmental impact of their use.

The Platform on Sustainable Finance uses four high-level categories to define substantial contributions to the circular economy:

1. Circular design & production: design and produce products and materials with the aim of retaining long-term value and reducing waste; promoting dematerialization by making products redundant or replacing them with a radically different product or service;
2. Circular use: life extension and optimized use of products and assets during the use phase with the aim of retaining resource value and reducing waste to help improve usage and supporting service;  
3. Circular value recovery: capture value from products and materials in the after-use phase; 
4. Circular support: develop enabling digital tools and applications, education and awareness-raising programmes, and advisory services to support circular economy strategies and business models

What sectors are included?

The EU Commission has provided previous guidance upon where the emphasis needs to be placed with respect to accelerating the transition to a circular economy in particular the EU’s Circular Economy Action Plan published in 2020.

This pattern continues with respect to a taxonomy for the transition to a circular economy. In total, there are 19 economic activities outlined in the report grouped into manufacturing (plastics, packaging, textiles, electronics), civil engineering, buildings, restoration & remediation, sewerage and waste management.

The full list of economic activities included in the circular economy taxonomy is outlined below. Attached to these economic activities are an estimate 60 NACE codes.

Manufacturing

• Manufacture of plastic packaging goods
• Manufacture of electrical and electronic equipment
• Wearing apparel, except articles of fur and leather: manufacturing, repairing/refurbishing/remanufacturing and sale of spare parts, sale of second-hand, product-as-a-service and other circular use- and result-oriented service models
• Footwear and leather goods: manufacturing, repairing/refurbishing/remanufacturing, sale of second hand, product-as-a-service and other circular use- and result-oriented service models
• Furniture: manufacturing, repairing/refurbishing/remanufacturing and sale of spare parts, sale of second-hand, product-as-a-service and other circular use- and result-oriented service models
• Repair, refurbishment and remanufacturing, and sale of spare parts
• Preparation for re-use of end-of-life products and product component
• Sale of second-hand goods
• Product-as-a-service and other circular use- and result oriented service models

Civil Engineering

• Maintenance of roads and motorways

Buildings

• Construction of new buildings
• Renovation of existing buildings

Restoration, Remediation

• Remediation activities

Sewerage

• Phosphorus recovery from wastewater
• Production of alternative water resources

Waste management

• Collection and transport of non-hazardous and hazardous waste as a means for material recovery
• Recovery of bio-waste by anaerobic digestion and/or composting

It is important to note that economic activities that lean heavily towards circular business models are also included under manufacturing. These include, for example, sale of spare parts and sale of second-hand goods as well as “product as a service”.

The built environment also gets significant attention which includes civil engineering and buildings. Indeed, the criteria set out under these economic activities is anticipated to cause significant disruption to the civil engineering and buildings industries in the coming years.

What’s next?

It is expected that further economic activities will be added in the coming months with the relevant delegated act expected at the end of 2022.

In addition, it is anticipated that the Do No Significant Harm (DNSH) criteria in relation to the transition to the circular economy will be updated across all five other objectives.

It is acknowledged that, as of the time of writing, DNSH is either weak or N/A for multiple economic activities under, for example, climate mitigation.

It is expected that many economic activities included in the climate delegated act will, as part of DNSH, need to develop a circular economy mitigation plan to identify any risk to the transition to a circular economy and put mitigation measures in place accordingly. In the mitigation plan or approach, it is recommended that the following principles should be considered:

• Reuse and preparation for reuse of products and components, and use of secondary raw materials, including through high-quality recycling;
• Design for longevity, sharing, reuse, repair, refurbishment, remanufacturing, repurposing, and recycling of products; 
• Waste management that prioritises prevention and preparing for reuse and for recycling over incineration and disposal of waste; 
• Regeneration of nature by replenishing renewable resources at a rate that is at least as large as the depletion rate linked to the activity; 
• Information on and traceability of material content and product composition throughout the lifecycle of materials and products.

The above illustrates that the transition to a circular economy will create both challenges and opportunities for all economic activities that are included across all six Taxonomy objectives, not just those specifically eligible for significantly contributing to the transition to a circular economy.

Moving forward

EU Taxonomy “history” tells us that the technical criteria for significant contribution to the transition to a circular economy that are now recommended will make their way to a delegated act. Thus, it is important that enterprises that are eligible to illustrate significant contribution start now.

We at Ramboll expect that the pace at which this will move will be swifter than climate i.e. from recommendations to delegated act to full alignment disclosure Yes, more economic activities will be added, but those included now will remain. 

Aligning with the circular economy taxonomy will be challenging as the language is relatively new in comparison to, for example, climate mitigation, so sectors such as manufacturing of electronics and civil engineering/buildings really need to think and act strategically from today.

But it is not just non-financial institutions that need to take note. A circular economy taxonomy provides opportunity for investors also. There is now much greater clarity around what is and what is not circular (at least in relation to the included economic activities). A Circular Economy Taxonomy will help greatly in guiding investment decisions, assessing scale and return on investment as well as aid in assessing investment risk due to much needed clarity surrounding circular metrics and criteria.  

¹Platform on Sustainable Finance’s report with recommendations on technical screening criteria for the four remaining environmental objectives of the EU taxonomy | European Commission (europa.eu)