Taxonomy - What’s in there for real estate companies?

The achievement of these climate targets is being intensively pursued at EU level through the European Green Deal and the EU Financing Sustainable Growth Action Plan: By 2050, Europe should be climate neutral. To achieve this, greenhouse gas emission targets for 2030 are to be reduced by 55% compared to 1990. Overall, the EU is pursuing six environmental objectives:

1. Climate change mitigation

2. Climate change adaption

3. Sustainable use and protection of water and marine resources

4. Transition to a circular economy

5. Pollution prevention and control

6. Protection and restoration of biodiversity and ecosystems

To meet these objectives, the EU Commission has introduced several far-reaching measures, of which the following seem particularly relevant for real estate companies:

1. EU renovation wave

2. EU sustainable finance taxonomy

3. EU non-financial reporting directive

 

Taxonomy – what is it?

Europe will not meet its climate goals and 2030 targets unless financial investments are directed towards sustainable projects and activities. Therefore, in June 2020, legislation on the uniform classification of sustainable investments (taxonomy) came into law. This legislation defines criteria for determining which financial products and investments may be declared ‘sustainable’ and what is their impact on environment. Taxonomy concerns both, residential and commercial real estates and is to introduce a common language for investors, issuers and regulators regarding what should actually be hidden under the terms green and sustainable in the context of construction. Within the buildings sector, the aim is to apply clearly defined taxonomy criteria (‘thresholds’) to new buildings, renovation measures and the acquisition and ownership of buildings. Moreover, it will be it will be particularly important for commercial real estate market due to the possibility of classifying the building as a portfolio of assets covering green bonds. But the main aim is to optimise the contribution of the buildings sector to Europe’s climate goal by transforming existing buildings and constructing new buildings to a net zero carbon standard.

 

What do I need to do?

Real estate companies that have to prepare non-financial reports in accordance with the non-financial reporting directive will have to disclose the proportion of their turnover, Capex and Opex derived from construction, renovation, acquisition or ownership of buildings, that substantially contribute to climate change mitigation. It is therefore necessary to meet demanding criteria concerning primary energy demand, air-tightness and thermal integrity as well as life cycle global warming potential. Moreover, the activities may not significantly harm neither the other five EU environmental objectives nor minimum safeguards for workforce safety and human rights. In addition to energy efficiency targets, real estate companies will be required to meet ambitious goals regarding water consumption, circular economy (at least 70% of non-hazardous construction and demolition waste shall be prepared for re-use, recycling and other material recovery) as well as pollution goals. These disclosures on turnover, Capex and Opex will be of significant relevance for investors in real estate companies to structure their investment decisions and as a basis for their own taxonomy reporting obligations as of the SFDR. The taxonomy criteria furthermore form the basis of the EU green bond standard.

The first ‘Delegated Acts’ that will implement these thresholds for climate change mitigation are expected to be published in the first half of 2021.18 Further criteria for circular economy in construction are in development and planned for publication later in 2021. These could help drive investment towards lowering embodied carbon in construction.

Finally, activities and legislation planned by the EU are also aimed at efficient collecting of data related to the impact of real estate on the environment in terms of market value. Such an opportunity will be especially valuable for those planning long-term real estate investment strategies in Europe. These, in turn, will increasingly depend on the adaptation of buildings to the requirements of energy efficiency and zero emissions. The costs of their possible adaptation are likely to constitute a significant part of the investment. It should also be expected that the possibility of obtaining funds from the EU will be increasingly dependent on meeting the criteria specified in the taxonomy.