DNSH Principle: Key to Sustainability and Securing European Funds

Compliance with the Do No Significant Harm (DNSH) principle is an opportunity for companies to bring sustainability to the center of their growth strategy and access funding from Next Generation EU’s Recovery and Resilience Facility (RRF), the plan that supports interventions that comply with the European Green Deal, theParis^Agreement1 and the United Nations Sustainable Development Goals (^SDGs2).

To ignore the importance of DNSH is to risk losing access to important funds to secure the transition to a greener and more sustainable future, because all interventions under the NRP must comply with this principle with at least 37 percent of resources allocated to sustainable projects.

The DNSH principle and environmental eligibility criteria.

The Do No Significant Harm (DNSH) principle plays a key role in regulating and financing environmentally sustainable projects: it was created to harmonize economic growth and environmental protection, ensuring that investments do not compromise natural resources.

Member states’ compliance with the DNSH is a mandatory step, as it is a constraint on access to funding and is used to determine how each economic activity must not cause significant harm to any of the following environmental objectives outlined in the Green Taxonomy, a classification system coined by the European Union to provide appropriate definitions as to why economic activities can be considered sustainable:

DNSH is part of the broader concept of sustainable finance, which integrates ESG (Environmental, Social and Governance) factors into investment decisions, fostering the development of a long-term green economy through the involvement of private capital.

Based on the indications of the European regulations and the relevant Italian reception, all interventions that will be studied and submitted to be financed with PNRR funds will have to comply with what is required by the DNSH principles. These include projects that fall under the Transition 5.0 umbrella, which must be 100 percent compliant with sustainability goals, with specific energy savings and the exclusion of fossil fuel use.

DNSH technical assessment is required for:

• Consider interventions on “green and sustainable” projects;
• Contribute to achieving the specific goals of the Green Deal;
• To estimate the direct and indirect effects of the funded interventions on the six environmental objectives outlined within the Green Taxonomy, in the long run.

These can be traced to four different scenarios:

Following the identification of scenarios, interventions can follow two different paths, called approaches, for disbursing the necessary funds, based on the possible risks they pose from an environmental perspective.

The approaches

The first approach, termed simplified, classifies the intervention into one of the first three scenarios and is associated with a limited risk of environmental damage, regardless of its actual contribution to the green transition.

The second approach, on the other hand, defined as in-depth analysis and conditions to be met, involves a more advanced and meticulous assessment of fundable interventions, because actions that fall within this scenario have both a greater risk of impacting one or more of the six environmental objectives and a greater potential for climate change mitigation. Interventions in the energy, transport, or waste management sectors, which by the very nature of the process are highly impactful, but may have very high mitigation potential, fall under this scenario.

The evaluation criteria guide

To simplify the evaluation criteria, the Ministry of Economy and Finance has updated the Operational^Guide3, the latest version of which was made available in May 2024 and included as an implementation reference in the Transition Operational Circular 5.0.
Several cases are given in this paper as examples to be adapted to DNSH evaluation needs; these are projects that have already been submitted and have been awarded funding, requiring the compilation and drafting of checklists, both ex-ante and ex-post, with the specifications necessary to comply with the required parameters for the submission of the activities to be funded.
To view and clarify details on exceptions, the GSE made FAQs available on Sept. 25, available at this page: FAQ_MIMIT_8-10-2024.pdf

Methodology of the application of the DNSH Principle

Compliance with the DNHS principle is verified ex-ante for each measure using standardized self-assessment forms, as outlined by the MEF in the most recent version of the operational guide.
These tabs influence the design of investments and reforms and/or qualify their characteristics with specific guidance in order to limit their impact on environmental objectives to a sustainable level.

The data sheets

Fact sheets are the key tool in verifying compliance with the principle. ⁴ They provide PNRR measure-holding Administrations and implementing entities with a summary of operational and regulatory information on taxonomic requirements and any purchasing characteristics and choice on supplies.

The data sheets are divided into the following versions:

1. ^NACE5 reference code (if applicable) of economic activities.
2. Scope of the sheet: frames the topic covered, any specific exclusions, and related data sheets.
3. Guiding Principle: represents the environmental prerequisite for which the Taxonomy needs to be adopted; specifies the arrangements provided for the substantial contribution, i.e., Scheme 1^.6
4. DNSH constraints: lists the verification elements to demonstrate compliance with the principles required by the technical guidelines on DNSH implementation for each of the six environmental objectives.
5. Rationale for the constraints: explain why the constraints, related to each of the six environmental objectives, are in place.
6. DNSH Reference Legislation: includes the specialties introduced by the Taxonomy Regulation and Delegated Regulations (EU) 2021/2139 and 2023/2486, compared to the existing national legislation.

The self-assessment forms shared with the European Commission are available on the Italy Tomorrow portal on the following page: The DNSH (Do No Significant Harm) principle in the PNRR – Italy Tomorrow.

The planning and financing phase

Commitments made by administrations during the self-assessment phase must be translated into precise warnings and closely monitored throughout the entire project life cycle, from the start-up phase to acceptance or issuance of the certificate of proper execution.

At the planning and financing stage, the essential elements required for DNSH compliance should be made explicit in financing decrees and technical tender documents. It is useful to provide automatic administrative mechanisms that can lead to suspension of payments and avocation of proceedings in case of non-compliance with the principle.

The design and tender phase

During the design and bidding phase, it is essential that the design guidance document provide specific technical guidance to ensure compliance with the principle. Design documents, specifications, and specifications must include detailed guidance that allows for verification of compliance with the imposed conditions even during construction progress.

To ensure compliance with DNSH constraints in the implementation phase, measure-holding administrations and implementing entities must:

Each stage of intervention must be accompanied by specific monitoring tools that demonstrate compliance with the DNSH principle.

Conclusions

In light of the regulatory framework, DNSH compliance imposes stringent constraints. All interventions under the NRP must conform to this principle and contribute to the ecological transition. At least 37% of resources must be allocated to sustainable projects in line with the goals of the Next Generation EU^.7

The “Do No Significant Harm” principle is a key pillar on the path to sustainable economic growth by integrating environmental goals into project development and production processes.

The main challenge will be to ensure proper and widespread implementation, directing both public and private investments toward long-term sustainability, requiring continuous commitment and constant collaboration among institutions, implementers and entrepreneurs.

Adherence to the DNSH principle is one of the building blocks for the realization of a world in which circular economy, decarbonization, and biodiversity protection are the foundations of a more just and prosperous society.