Making sustainable finance taxonomies work for the circular economy

Lessons from the EU Taxonomy

Research paper Published 15 June 2023 ISBN: 978 1 78413 569 0 DOI: 10.55317/9781784135690

A worker places sports shoes of various colours on a conveyor belt in a shoe recycling factory.

Dr Jack Barrie

Senior Research Fellow, Environment and Society Centre

Dr Patrick Schröder

Senior Research Fellow, Environment and Society Centre

Suzannah Sherman

Research Associate, Sustainability Accelerator, Environment and Society Centre

Circular economy initiatives face a significant gap in the availability of finance. Annual worldwide circular economy spending by the corporate sector is estimated at around $850 billion, compared with $35 trillion spent on existing ‘linear’ economic models. Awareness of the circular economy among investors and in the financial sector generally is still low, and there is a lack of tools available with which to define and measure those activities that substantially contribute to the circular economy transition, as well as the investment opportunities and risks associated with those activities.

Sustainable finance taxonomies – i.e. shared classification systems for defining environmentally sustainable investments – could help unlock the additional investment needed. The EU’s Sustainable Finance Taxonomy is the most ambitious and comprehensive existing taxonomy, and includes the transition to a circular economy as one of its key objectives. This research paper presents a detailed case study of the EU Taxonomy and identifies the unique challenges associated with embedding the circular economy, with the aim of informing the development of similar taxonomies elsewhere.

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02 The EU Sustainable Finance Taxonomy: A case study

The EU’s Sustainable Finance Taxonomy is one of the first in the world to include the circular economy as a core objective. It therefore offers valuable lessons on political, technical and procedural challenges for future taxonomies.

2.1 Overview of EU Sustainable Finance Taxonomy development

The EU has set ambitious environmental targets over the past few years. For example, it aims to become the ‘first climate-neutral continent by 2050 and to reduce greenhouse gas emissions by at least 55 per cent by 2030 compared to 1990 levels’.12 Through the Taxonomy, the EU also aims to strengthen its resilience to climate change, to reverse biodiversity loss and the broader degradation of the environment, as well as enabling the transition to a circular economy.

Achieving these targets requires a substantial increase in investment. The EU alone will require roughly €350 billion in additional investment per year over the current decade to meet its 2030 emissions-reduction target in energy systems. This is additional to the €130 billion the EU will need for other environmental goals.13 Looking beyond the 2030 investment horizon, one study estimated that, during the period 2020 to 2050, a policy path compliant with the 2015 Paris Agreement on climate change will require public investments in the EU of between €11.7 billion and €16.3 billion per year above historic rates, excluding the transport sector.14

To help achieve these ambitious targets, the EU launched the Sustainable Finance Framework in 2018 and a supporting Sustainable Finance Strategy in 2021.15 The Framework has three complimentary components (Figure 2).

Figure 2. Foundations for EU Sustainable Finance Framework

One part is a mandatory disclosure regime for both non-financial and financial companies, intended to provide investors with the information necessary to make informed sustainable investment decisions. This regime includes the proposal for a Corporate Sustainability Reporting Directive (CSRD), under which companies are required to disclose information on the impact of its activities on the environment and society; and the Sustainable Finance Disclosure Regulation (SFDR) – in force since April 2021 – which requires companies to report on the business and financial risks it faces due to its sustainability exposures (the ‘double materiality’ concept).16

Another is the development of tools covering benchmarks, standards and labels. Examples include the EU Climate Transition Benchmarks Regulation17 and proposal for a standard for European green bonds.18 These tools will make it easier for financial market participants to align their investment strategies with the EU’s climate and environmental goals.

Finally, and most significantly, is the EU Sustainable Finance Taxonomy, which is the focus of this paper. The Taxonomy aims to provide ‘a robust, science-based classification system, allowing non-financial and financial companies to share a common definition of sustainability and thereby providing protection against greenwashing.’19 It is also intended to help investors and companies to plan and report on their sustainability transition. The EU Taxonomy Regulation (2020/852) was adopted in June 2020 and entered into force the following month.20 The Taxonomy applies to:

Financial market participants, including occupational pension providers, offering financial products in the EU;
Large companies that are required to report under the Non-Financial Reporting Directive (NFRD; set to be revised by the CSRD); and
The EU and its member states.21

Structure of the EU Taxonomy

The EU Taxonomy establishes six main environmental objectives (Box 1). Each objective itemizes a range of economic activities and criteria22 aimed at ensuring the activity significantly contributes to the goal of the objective without significantly harming the other objectives. The current version of the EU Taxonomy covers an initial subset of economic sectors. However, the number of sectors included is likely to expand over time. The economic activities assessed under each objective are classified according to the EU NACE codes.23

Box 1. EU Taxonomy objectives

1. Climate mitigation (mandatory reporting from January 2022);

2. Climate adaptation (mandatory reporting from January 2022);

3. Sustainable use and protection of water and marine resources (mandatory reporting from January 2023);

4. Transition to a circular economy (mandatory reporting from January 2023);

5. Pollution prevention and control (mandatory reporting from January 2023); and

6. The protection and restoration of biodiversity and ecosystems (mandatory reporting from January 2023).

The relationship and complimentarity between the six environmental objectives is based on the Drivers, Pressures, States, Impacts and Response (DPSIR) framework (Figure 3). The circular economy is a relatively unique objective, in that it is considered primarily an economic and societal response or system change required to reduce pressures or change the response for all of the environmental objectives. The other objectives, meanwhile, largely attempt to mitigate pressures (such as preventing land, sea and air pollution) and/or achieve a state change (on terrestrial and marine ecosystems). Although it should be noted that all six objectives are closely linked and overlap in many respects.

Figure 3. The circular economy as an enabler for other environmental objectives and reducing pressures

— Source: Adapted from Platform on Sustainable Finance (2022), Technical Working Group: Part A: Methodological report, March 2022, https://finance.ec.europa.eu/system/files/2022-04/220330-sustainable-finance-platform-finance-report-remaining-environmental-objectives-taxonomy_en.pdf.

The circular economy is embedded within the EU Taxonomy in two main forms (Figure 4). First, as shown above, it is one of the six main environmental objectives. The circular economy objective outlines the overall ambition level to achieve in terms of the transition, which is underpinned by substantial contribution criteria for a range of economic activities. Second, criteria are defined which ensure circular economy activities ‘do no significant harm’ (DNSH) to the other five objectives and comply with minimum social safeguards.24 DNSH criteria are also defined for the other five objectives to prevent harm to the circular economy.

Figure 4. Structure of the circular economy objective and the four basic conditions

— Source: Adapted from Platform on Sustainable Finance (2022), Technical Working Group: Part A: Methodological report.

The EU Taxonomy is the only such initiative to date that explicitly incorporates the circular economy, although both South Africa and the UK have declared that circularity will be a core objective of their own taxonomies under development. The construction and development of the technical screening criteria (TSC) to operationalize the EU Taxonomy’s six environmental objectives (particularly that on the circular economy) required substantial input from a broad range of subject experts. As such, the Platform on Sustainable Finance (PSF) was established to offer continuous advice to the European Commission, pooling expertise from the corporate and public sectors, industry, academia, civil society and the financial sector.

In March 2022, the PSF published its first set of proposed TSC for the four remaining environmental objectives, including objective 4 – transition to a circular economy.25 In October 2022, a second, supplementary set of recommendations was published, which put forward additional TSC and provided a framework methodology to include ‘enabling’ activities (i.e. activities that contribute substantially to one or more of the environmental objectives by directly enabling other activities to make a substantial contribution).26

2.2 Substantial contribution to the circular economy transition

A circular economy activity is considered taxonomy-aligned if it: (i) makes a substantial contribution to the transition to a circular economy (see Box 2 for the definition of a circular economy); (ii) does no significant harm to any of the other five objectives; and (iii) complies with minimum social safeguards.

Box 2. Definition of the circular economy as adopted in the EU Taxonomy

‘[C]ircular economy’ means 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, thereby reducing the environmental impact of their use, minimising waste and the release of hazardous substances at all stages of their life cycle, including through the application of the waste hierarchy…’

Source: Official Journal of the European Union (2020), Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation(EU) 2019/2088, 22 June 2020, https://eur-lex. europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32020R0852&from=EN, art. 2.

Substantial contribution to the circular economy transition is determined by the combination of the headline ambition of the circular economy objective and the supporting TSC defined for each economic activity.

2.2.1 Circular economy objective ambition

Each environmental objective is underpinned by a headline ambition level which provides the intended goal of the objective. As outlined by the PSF, the headline ambition level should be ‘science-based, based on international agreements that EU supports, [and or] reflect EU’s response to international agreements or EU’s leadership on an objective’.27

The proposed headline ambition for the circular economy objective (Box 3) is to significantly reduce the EU’s material footprint.28 This ambition was based on a range of published strategies and targets, including the European Commission’s commitment to develop indicators on resources encompassing consumption and material footprints; and the European Parliament’s call for binding targets to reduce the EU’s material and consumption footprints by 2030 and bring them within planetary boundaries by 2050. The ambition is laudable but, as there are no legally binding agreements on the circular economy, material and resource efficiency or consumption reduction targets at the EU or multilateral levels, there are many challenges to overcome before it can be achieved (Section 3.1.1). Despite the absence of legal material consumption reduction targets at the EU level, some EU member states – such as Austria29 and the Netherlands30 – have introduced non-binding targets at the national level. However, these targets are considered exceptions to the rule and are not aligned with each other.31

Box 3. Headline ambition and targets for the EU Taxonomy circular economy objective

By 2030, economic growth is decoupled from extraction of non-renewable resources and 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 ecosystems.

Target 1: Reducing the EU27 material footprint by 50 per cent by 2030 and by 75 per cent by 2050 (compared with a 2015 baseline of 14 tons per capita); and raising the circular material use rate of all materials to increase the average to at least 25 per cent by 2030. This target will be achieved by promoting increased durability, repairability, upgradability, reusability or recyclability of products; and by remanufacturing, preparing for reuse and recycling of used materials and products.

Target 2: Cultivating 25 per cent of total agricultural land and production forestry by 2030 and 100 per cent by 2050 using regenerative production methods. This target will be achieved by promoting regenerative agricultural practices such as agroecology and silvopasture.

Source: Platform on Sustainable Finance (2022), Technical Working Group: Supplementary: Methodology and Technical Screening Criteria, p. 29.

2.2.2 Technical screening criteria for substantial contribution

Under each environmental objective, a list of economic activities (as categorized by the EU NACE codes) were identified as having the potential for substantial contribution to each environmental objective. For each activity, a series of TSC – including on the circular economy – were developed by the PSF and Joint Research Council (JRC) (with initial input from the Technical Expert Group on Sustainable Finance) for adoption by the European Commission. Each TSC attempts to provide clear guidance on how each economic activity should be performed in order to substantially contribute to the circular economy while doing no significant harm to the other objectives.

The lack of internationally recognized standards and methodologies32 for measuring and evaluating circular activities has to date obstructed ‘the development and access to dedicated or non-dedicated finance, credit risk assessment, and the transferability and replicability of projects and investments across regions and jurisdictions’.33 To overcome this challenge, the PSF and JRC took a clear and robust methodological approach to determine and define how an activity can make a substantial contribution to the circular economy transition.34 The JRC identified four high-level categories to define substantial contribution (Box 4). Categories 1–3 each cover a single phase of a circular material life cycle, from production to use and subsequent recovery. Category 4 applies along the full material cycle.

Box 4. Categories to define substantial contribution to the circular economy

1. Circular design and production. Design and produce products and materials with the aim of retaining long-term value and reducing waste. Promote dematerialization by making products redundant or replacing them with a radically different product or service;

2. Circular use. Extend life and optimize 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. Activities that contribute to the circular economy objective by enabling other circular activities to take place, thus reducing pressure on the environment. There are two categories of enabling activities can be distinguished:

(a) Those that act on individual activities: Examples include advisory services; activities providing (digital) tools for eco-conception; predictive maintenance; resource efficiency; development and manufacturing of equipment and machinery intended to enable circular production; and waste management; and
(b) Those that intervene at the interface between different activities: Examples may include digital marketplaces for second-hand products or materials and activities involved in setting up industrial symbiosis strategy (e.g. installation of pipelines to transfer waste heat); enabling digital tools and applications, education and awareness-raising programmes; and advisory services to support circular economy strategies and business models.

Source: Canfora, P. et al. (2022), ‘Development of the EU Sustainable Finance Taxonomy –  A framework for defining substantial contribution for environmental objectives 3-6, EUR 30999 EN’, Luxembourg: Publications Office of the European Union, https://publications.jrc.ec.europa.eu/ repository/handle/JRC126045.

A range of different approaches to evaluating substantial contribution were identified for each of the four categories (Figure 5). Each category of substantial contribution to the circular economy lends itself to a different approach.35

Figure 5. Suitability of approaches across all types of substantial contribution to a circular economy

— Source: Canfora et al. (2022), ‘Development of the EU Sustainable Finance Taxonomy’.

Once the most suitable approach or approaches were identified for each category, a series of draft TSC were then formulated for each given economic activity (see Table 1 for an example).

Table 1. TSC for textiles and garments

Categories of substantial contribution	Performance criteria	Standards and certification schemes referenced
Design for sustainability and durability	Compliance with holistic and detailed certifications for sustainable manufacture. High performance on standardized tests (as specified by ISO) for fabric resistance to piling and abrasion, colour fastness and durability of water, oil and stain repellents.	ISO standards for quality tests (multiple); EU Ecolabel; Blue Angel Ecolabel; upcoming EU Product Environmental Footprint Category Rules.
Sourcing of sustainable fibres	Recycled and renewable synthetic content at least 70 per cent of garment weight and third-party verified; Recycled content (pre- or post-consumer) traceable to the feedstock source; Man-made cellulosic fibres (MMCF) from certified sources; Virgin cotton or natural cellulosic seed-fibres compliant with production and inspection requirements for organic production.	Recycled content: RCS, SCS, UL 2809; verification and traceability in line with ISO 14021; MMCF: FSC, PEFC; Organic cotton: USDA NOP; Council Regulation (EC) No 834/2007.
Design for recycling	For cellulose-based fibres, no more than 10 per cent non-cellulose-based content by weight; For protein-based fibres, no more than 2 per cent non-protein-based content by weight; For synthetic fibres, only mono-material polyester and polyamide accepted; Elastane content cannot exceed 2 per cent; No more than two fibres to be blended.	None listed.
Chemical restrictions	Comprehensive restrictions of Substances of Very High Concern under REACH regulations, both for the final product and during all production stages; Requirement of 90–95 per cent biodegradability, recyclability or eliminability in wastewater treatment for most spinning, sizing and wet treatment agents.	Final product restrictions: EU Ecolabel; Blue Angel Ecolabel; AFIRM V.6; STANDARD 100 (OEKO-TEX). For dyes and auxiliaries: ZDHC Manufacturing Restricted Substance List V2.0. For test results: Performance supported by ISO 17025-accredited laboratory.

Source: Canfora et al. (2022), ‘Development of the EU Sustainable Finance Taxonomy’.

2.3 ‘Do no significant harm’ to the circular economy

Demonstrating that investments ‘do no significant harm’ is a cornerstone of the  EU Sustainable Finance Framework. The inclusion of DNSH criteria ensures that any activity that substantially contributes to one of the six environmental objectives does not inadvertently and adversely impact the other five (otherwise referred to as environmental burden-shifting). DNSH criteria for the circular economy are included under each substantial contribution activity housed in the other five environmental objectives (Box 5). DNSH criteria also help to integrate circularity across the other five environmental objectives by ensuring that all classified economic activities respect minimum circular economy safeguards.

Box 5. DNSH criteria for a circular economy

An activity is considered to do significant harm* to the transition to the Circular Economy (including waste prevention and recycling) if that activity:

(i) leads to significant inefficiencies in the use of materials or in the direct or indirect use of natural resources (…) at one or more stages of the life cycle of products, including in terms of durability, reparability, upgradability, reusability or recyclability of products;

(ii) leads to a significant increase in the generation, incineration or disposal of waste, with the exception of the incineration of non-recyclable hazardous waste; or

(iii) the long-term disposal of waste may cause significant and long-term harm to the environment.

And that: ‘both the environmental impact of the activity itself and the environmental impact of the products and services provided by that activity throughout their life cycle shall be taken into account, in particular by considering the production, use and end of life of those products and services’.

* As outlined in Article 17 of the EU Taxonomy Regulation. Source: Lexparancy (undated), ‘Article 17 — Significant harm to environmental objectives’, https://lexparency.org/eu/32020R0852/ART_17.

In the most recent version of the EU Taxonomy, DNSH criteria for the circular economy within the climate mitigation and adaptation objectives are either missing entirely or vary widely in terms of detail and objectivity depending on the nature of the economic activity. This results in unjustified differences in their ease of implementation and effectiveness in preventing harm across various economic activities. The following three examples demonstrate how variable the current DNSH criteria are.36

Highly detailed DNSH criteria defined:

Manufacture of batteries (sector code 3.4). Recycling processes meet the conditions set out in Article 12 and in Annex III, Part B, of Directive 2006/66/EC, including the use of the latest relevant Best Available Techniques, the achievement of the efficiencies specified for lead–acid batteries, nickel–cadmium batteries and for other chemistries. These processes ensure the recycling of the metal content to the highest degree that is technically feasible while avoiding excessive costs. Where applicable, facilities carrying out recycling processes meet the requirements laid down in Directive 2010/75/EU.

Moderately detailed DNSH criteria defined:

Manufacture of renewable energy technologies, equipment for the production and use of hydrogen, low carbon technologies for transport, energy efficiency equipment for buildings and other low carbon technologies (sector codes 3.1–3.3 and 3.5–3.6). Assess the availability of and, where feasible, adopt techniques that support: (a) reuse and use of secondary raw materials and reused components in products manufactured; (b) design for high durability, recyclability, easy disassembly and adaptability of products manufactured; (c) waste management that prioritizes recycling over disposal in the manufacturing process; and (d) information on and traceability of substances of concern throughout the life cycle of the manufactured products.

Low/no detail of DNSH criteria defined:

Manufacture of plastics on primary form and of organic basic chemicals, but also for the manufacture of cement, aluminium, iron and steel, hydrogen, carbon black, soda ash, chlorine anhydrous ammonia and nitric acid (sector codes 3.7–3.17).

2.4 Sectoral example: Built environment

The built environment sector has the second highest environmental impact in the EU, exceeded only by food. Construction has the highest raw material consumption (1.8 billion tons) when considering all types of materials together – mostly comprising non-metallic minerals.37 But these materials are not being fully utilized and much is wasted. Around 35 per cent of the EU’s total waste is generated by the construction sector.38 Circular economy solutions could significantly mitigate these harms and reduce the life cycle impacts of built environment projects.

The EU Taxonomy holds significant potential to drive ambition and incentivize the closure of this circularity gap given the scale of construction investment across Europe. In 2021, total investment in construction increased by 5.2 per cent, accounting for €1.6 trillion or 11.1 per cent of EU GDP.39 A ‘renovation wave’ is also expected, with around €275 billion of additional investment in building renovation needed every year to achieve the EU’s proposed 55 per cent emissions reduction target by 2030.40

The Taxonomy already defines how the built environment can substantially contribute to climate objectives and how it can harm others. In March 2022, the PSF also presented draft criteria for how construction and renovation can substantially contribute to the circular economy.41 Since then, additional work has been conducted on draft TSC for demolition of buildings and other structures.42

Around 35 per cent of the EU’s total waste is generated by the construction sector. Circular economy solutions could significantly mitigate harms and reduce the life cycle impacts of built environment projects.

It seeks to drive performance through a focus on extending the life of materials, components and building through a variety of ways. Crucially, the PSF technical working group presented separate recommendations for construction of new buildings and renovation of existing buildings. Common elements in each include a focus on the design stage to ensure resource efficiency and avoid over-specification; keeping construction products and materials in use and at their highest value; and information and data provision such as life cycle assessments (LCA) and digital databases (see Table 2 for more detail on draft preliminary criteria).

Table 2. Draft recommendations for contribution to circular economy in the construction of new buildings and renovation of existing buildings

Draft recommendations for substantial contribution to the circular economy transition43, 44	Construction of new buildings	Renovation of existing buildings	Demolition
At least 90 per cent (by weight) of the non-hazardous construction and demolition waste generated on the construction site is prepared for reuse or recycling	Yes	Yes	Yes
A life cycle assessment of the entire building has been calculated and the results are made publicly available	Yes	Yes	n/a
Construction designs and techniques support circularity	Yes	Yes	n/a
At least 50 per cent of original building is retained	n/a	Yes	n/a
The asset comprises at least 50 per cent from a combination of reused components, recycled content or responsibly sourced renewable materials	Yes	Yes	n/a
Components and materials used in the construction do not contain asbestos or other substances of very high concern	Yes	Yes	n/a
Electronic tools are used to describe the characteristics of the building as built. The information is stored in digital format and made available to the client	Yes	Yes	n/a
The building renovation complies with the applicable requirements for major renovations. Alternatively, it leads to a reduction of primary energy demand of at least 30 per cent	n/a	Yes	n/a
Conduct a pre-demolition audit and agree with client key performance indicators and procedures	n/a	n/a	Yes
DNSH criteria on the circular economy45
At least 70 per cent (by weight) of the non-hazardous construction and demolition waste generated on the construction site is prepared for reuse, recycling and other material recovery	Yes	Yes	Not stated
Operators limit waste generation in processes related to construction and demolition, in accordance with the EU Construction and Demolition Waste Management Protocol	Yes	Yes	Not stated

Achieving these criteria will require a dedicated effort and a step-change along several parts of the built environment value chain to integrate circular economy models and objectives. A number of sectoral characteristics highlight some important implications for taxonomy application and use in the built environment:

Time frame of material use. The longevity of materials used in built environment assets is often greater than the business planning cycles.46 This can introduce uncertainty over future considerations at end-of-life and how to understand future markets, policies and technologies that may influence activity decisions over the life cycle. The EU Taxonomy gives a snapshot in time and is not well suited to incentivizing improvements over the longer term.
Owner/operator models and incentives. Circular renovation is another important aspect of reaching a circular built environment but is often given less attention than new construction. For renovation, the challenge of varying owner/operator models can result in misaligned incentives to invest, as the costs and the benefits accrue to different actors. Scaling up the use of Design-Build-Operate-Maintain (DBOM) contracts could be one way to promote a life cycle approach and align incentives to maximize resource value.47
Missing secondary-material marketplace. The marketplace for securing high-quality and accessible secondary materials for construction is limited. Greater investment is needed in nodal service providers that can collect and add value to waste products for reuse.

Despite the challenges, the EU Taxonomy does provide a mechanism that could help to align fragmented and diverse actors along built environment value chains. In time, it could contribute to building the necessary critical mass to enable the establishment of new material-recovery services and to mainstream new ‘norms’ for design decisions across the industry.

European Environmental Agency (undated), ‘Total greenhouse gas emission trends and projections in Europe’, https://www.eea.europa.eu/ims/total-greenhouse-gas-emission-trends#:~:text=As%20part%20of%20as%20part,least%2055%25%20compared%20to%201990 (accessed 4 Feb. 2023).

In addition, there is a significant need for investments to ensure the reskilling and upskilling and support labour market transitions to achieve the energy and climate targets. See European Commission (2020), ‘Stepping up Europe’s 2030 climate ambition: Investing in a climate-neutral future for the benefit of our people’, communication, 17 September 2020, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0562; European Commission (2020), ‘Employment and Social Developments in Europe 2020’, annual review, 15 September 2020, https://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=8342.

Foundation for European Progressive Studies (2022), How to address Europe’s green investment gap,  policy brief, 5 May 2022, https://feps-europe.eu/wp-content/uploads/2022/05/final_5-may-22_footer- amend_how-to-address-europes-green-investment-gap.pdf.

European Commission (2021), EU Sustainable Finance Strategy, fact sheet, July 2021,  https://finance.ec.europa.eu/system/files/2021-07/210706-sustainable-finance-strategy-factsheet_en.pdf.

The concept of ‘double materiality’ recognizes that a company’s financial performance is influenced not only by traditional financial factors like revenue and expenses, but also by the environmental and social impact of its activities. At the same time, a company’s impact on the environment and society is also influenced by its financial decisions and activities.

European Commission (2020), ‘Implementing and delegated acts - EU Climate Transition Benchmarks Regulation’, https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/implementing-and-delegated-acts/eu-climate-transition-benchmarks-regulation_en.

European Commission (2021), ‘Proposal for a regulation of the European Parliament and of the Council on European green bonds’, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52021PC0391.

European Commission (2021), ‘Communication from the commission to the European Parliament, the council, the European Economic and Social Committee and the Committee of the Regions: Strategy for Financing the Transition to a Sustainable Economy’, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021DC0390.

European Commission (undated), ‘EU taxonomy for sustainable activities’, https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en.

United Nations Principles for Responsible Investment (2021), Investor Briefing: EU Taxonomy, briefing paper, https://www.unpri.org/download?ac=14786.

These criteria are established in secondary legislation via delegated acts.

The Statistical Classification of Economic Activities in the European Community. See Eurostat (undated), ‘Glossary: Statistical classification of economic activities in the European Community (NACE)’, https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Glossary:Statistical_classification_of_economic_activities_in_the_European_Community_(NACE).

This report does not cover the minimum social safeguards as they are not considered unique to the circular economy objective.

Initial tranche of recommendations divided into parts A and B. See Platform on Sustainable Finance (2022), Technical Working Group: Part A: Methodological report, March 2022, https://finance.ec.europa.eu/system/files/2022-04/220330-sustainable-finance-platform-finance-report-remaining-environmental-objectives-taxonomy_en.pdf; and Platform on Sustainable Finance (2022), Technical Working Group: Part B: Annex: Technical Screening Criteria, March 2022, https://commission.europa.eu/system/files/2022-03/220330-sustainable-finance-platform-finance-report-remaining-environmental-objectives-taxonomy-annex_en.pdf.

Platform on Sustainable Finance (2022), Technical Working Group: Part A: Methodological report.

Ibid.

Austrian Federal Ministry of Climate Action, Environment, Energy, Mobility, Innovation and Technology (undated), ‘Circular Economy Strategy’, https://www.bmk.gv.at/themen/klima_umwelt/abfall/Kreislaufwirtschaft/strategie.html.

Government of the Netherlands (undated), ‘Circular Dutch economy by 2050’, https://www.government.nl/topics/circular-economy/circular-dutch-economy-by-2050.

Zero Waste Scotland (2022), ‘Consumption Reduction Targets (Legal Status Research)’, 18 May 2022,  https://www.zerowastescotland.org.uk/research-evaluation/consumption-reduction-targets.

Various circularity standards and metrics have been, or are under development, but none have been  recognized or fully adopted at the global or even regional scale.

European Commission (2020), ‘Categorisation system for the circular economy’, report, 9 March 2020,  https://research-and-innovation.ec.europa.eu/knowledge-publications-tools-and-data/publications/ all-publications/categorisation-system-circular-economy_en.

Canfora, P. et al. (2022), ‘Development of the EU Sustainable Finance Taxonomy - A framework for defining substantial contribution for environmental objectives 3-6, EUR 30999 EN’, Luxembourg: Publications Office  of the European Union, https://publications.jrc.ec.europa.eu/repository/handle/JRC126045.

Ibid.

Examples drawn from European Environmental Bureau (2022), ‘Do No Significant Harm’

to Circular Economy in the Climate Taxonomy: Analysis and recommendations, report, April 2022,  https://eeb.org/wp-content/uploads/2022/04/Do-No-Significant-Harm-to-Circular-Economy- in-the-Climate-Taxonomy-EEB-report-April-2022.pdf.

Platform on Sustainable Finance (2022), Technical Working Group: Part B: Annex: Technical Screening Criteria.

Eurostat (2023), ‘Waste statistics’, https://ec.europa.eu/eurostat/statistics-explained/index.php? title=Waste_statistics.

European Construction Industry Federation (2022), ‘Overall construction activity’, https://fiec-statistical-report.eu/european-union.

European Commission (2020), ‘Questions and Answers on the Renovation Wave’, press release, 14 October 2020, https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_1836.

Platform on Sustainable Finance (2022), Technical Working Group: Part B: Annex: Technical Screening Criteria.

Ibid.

Platform on Sustainable Finance (2022), Technical Working Group: Supplementary: Methodology

and Technical Screening Criteria.

European Commission (undated), ‘About the EU Taxonomy Compass’, https://ec.europa.eu/sustainable-finance-taxonomy.

Acharya, D., Boyd, R. and Finch, O. (2018), From principles to practices: First steps towards a circular built environment, report, Arup and Ellen MacArthur Foundation, July 2018, https://ellenmacarthurfoundation.org/articles/first-steps-towards-a-circular-built-environment.

Ibid.

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Making sustainable finance taxonomies work for the circular economy

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02 The EU Sustainable Finance Taxonomy: A case study

2.1 Overview of EU Sustainable Finance Taxonomy development

Figure 2. Foundations for EU Sustainable Finance Framework

Figure 2. Foundations for EU Sustainable Finance Framework

Structure of the EU Taxonomy

Box 1. EU Taxonomy objectives

Figure 3. The circular economy as an enabler for other environmental objectives and reducing pressures

Figure 3. The circular economy as an enabler for other environmental objectives and reducing pressures

Figure 4. Structure of the circular economy objective and the four basic conditions

Figure 4. Structure of the circular economy objective and the four basic conditions

2.2 Substantial contribution to the circular economy transition

Box 2. Definition of the circular economy as adopted in the EU Taxonomy

2.2.1 Circular economy objective ambition

Box 3. Headline ambition and targets for the EU Taxonomy circular economy objective

2.2.2 Technical screening criteria for substantial contribution

Box 4. Categories to define substantial contribution to the circular economy

Figure 5. Suitability of approaches across all types of substantial contribution to a circular economy

Figure 5. Suitability of approaches across all types of substantial contribution to a circular economy

Table 1. TSC for textiles and garments

2.3 ‘Do no significant harm’ to the circular economy

Box 5. DNSH criteria for a circular economy

Highly detailed DNSH criteria defined:

Moderately detailed DNSH criteria defined:

Low/no detail of DNSH criteria defined:

2.4 Sectoral example: Built environment

Table 2. Draft recommendations for contribution to circular economy in the construction of new buildings and renovation of existing buildings