EU Taxonomy Regulation

The Taxonomy Regulation or Taxonomy is one of the initiatives resulting from Sustainable Finance Action Plan of the European Commission. Together with the CSRD and the SFDR, the Taxonomy constitutes the core elements for sustainability reporting. The Taxonomy is the central starting point, which clarifies what should be understood as “sustainable” for all directives and regulations related to sustainability reporting.

Currently, a small number of EU member states has one or more sustainability labels, all of which rely on different classification systems. This makes it difficult for investors to compare sustainable financial products within the European Union. Introducing a taxonomy at European level attempts to overcome this problem. Therefore, within each EU member state, the same meaning is given to “sustainable” (in the environmental sense), at least that is the intention of the Taxonomy.

The Taxonomy introduces a classification system for environmentally sustainable activities and investments. The Taxonomy requires funds to classify investment products that they promote as sustainable under the classification system that follows from the Taxonomy. For example, a fund must clarify to which of the six environmental objectives in the Taxonomy the financial product contributes. The Taxonomy sets clear limit values that determine when an investment may be classified as environmentally sustainable.

What is sustainable?

The Taxonomy Regulation has six environmental objectives:

An economic activity/investment qualifies as sustainable if it meets the following four criteria:

1. the activity contributes substantially to one of the six environmental objectives listed above. To assess whether there is a substantial contribution, technical screening criteria against which the activity is assessed have been formulated;
2. the activity does not seriously harm one or more of the other five environmental objectives (the “Do No Significant Harm” principle);
3. the activity is carried out in compliance with minimum social and governance safeguards, such as human rights and working conditions.

Sustainable activities in the Real Estate and Construction sector

Whether an activity contributes substantially to any of the six environmental objectives is determined by technical screening criteria. So far, only the technical screening criteria for the environmental objectives “climate change mitigation” and “climate change adaptation” have been established through implementing regulations. These criteria are scientifically based. New insights may cause the criteria to change in the future. The Taxonomy is therefore not static, but will follow and evolve with developments and insights in the field of sustainability.

Within the Real Estate sector, based on the established technical criteria, the environmental objectives climate change mitigation and adaptation may be met by carrying out activities in one of the following directions:

• Construction of new buildings: primary energy demand must be at least 10% below the threshold of energy efficient buildings. An “energy efficient building” is said to exist when the Dutch BENG (Bijna energieneutrale gebouwen) standard is met.
• Renovation of existing buildings: a major refurbishment or renovation must lead to a 30% reduction in primary energy demand or meet the requirements of the EU Energy Performance of Buildings Directive.
• Ownership and acquisition of buildings: a building acquired must have at least an energy label A if it was built before 31 December 2020, or it must be within the top 15% of the national building stock in terms of energy efficiency. Buildings constructed after 31 December 2020 must meet the criteria applicable to new buildings at the time of acquisition.
• Installation, maintenance and repair of renewable energy technologies: this can include the installation, maintenance and repair of solar panels, solar collectors, heat and cold storage and heat pumps.
• Installation, maintenance and repair of electric vehicle charging stations; Installation, maintenance and repair of energy efficient equipment: this may include adding insulation to existing parts of a building, such as exterior walls, roofs and basements, replacing existing windows with new energy-efficient windows or installing energyefficient light sources.
• Installation, maintenance and repair of instruments and devices for measuring, controlling and monitoring the energy performance of buildings: instruments and devices referred to may include, for example, zoned thermostats, smart thermostat systems and sensors, including motion and daylight control and smart meters for gas, heating, cooling and electricity.

Tools

There are several tools that summarize and explain the Taxonomy for market participants. For example, the European Union has introduced a Taxonomy Compass that makes it easy to identify which technical screening criteria apply per sector, including the Real Estate and Construction sector.

In addition, the Dutch Green Building Council (“DGBC”) published a Handbook EU Taxonomy in May 2023 in collaboration with 30 organisations from the Dutch Real Estate and Construction market. This handbook translates the requirements from the Taxonomy to the Dutch Real Estate and Construction sector.

Scope

With regard to financial products that classify as light or dark green, financial market participants are required to disclose to what extent their investment qualifies as environmentally sustainable based on the criteria from the Taxonomy.

The Taxonomy requires both financial market participants covered by the SFDR, and PIE’s covered by the NFRD to report - among other things - on the extent to which their products or activities are environmentally sustainable. The Taxonomy complements the NFRD and the SFDR by providing a common benchmark for sustainable activities.

Since the CSRD will gradually modify and expand the scope of the NFRD, large, medium and small enterprises will also eventually be required to report on their economic activities. As of 1 January 2024, large enterprises already covered by the NFRD will have to comply with more extensive reporting requirements under the CSRD. The Taxonomy will determine which economic activities of the enterprise qualify as environmentally sustainable for these reporting requirements. Certain reporting requirements under the CSRD are equal to the reporting requirements under the Taxonomy, meaning that these are also reflected in the applicable ESRS.

Impact Taxonomy on construction and real estate

Currently, the Taxonomy has, among others, an impact on financiers of (commercial) real estate and large institutional and private investors (offering sustainable financial products within the meaning of Articles 8 and 9 SFDR) and large (listed) real estate companies that fall within the scope of the NFRD/CSRD, among others.

Research from the DGBC shows that parties that already have a sustainability label (such as BREEAM-NL) to certify their real estate products are more likely to comply with the EU Taxonomy. The most recent BREEAM-NL guideline for existing buildings incorporates the criteria from the Taxonomy, meaning that certification will also result in faster compliance with the Taxonomy.

Parties within the Real Estate and Construction sector who want to contribute substantially to climate and environmental objectives can voluntarily decide to use the criteria from the Taxonomy when planning their transition to sustainability.

Furthermore, it is foreseeable that parties that have their activities aligned with the Taxonomy through sustainable finance will benefit from institutional and private investors who want to make a positive impact on the environment and from banks that are interested in green investments and are considering the possibility of being motivated (e.g. through green loans).