By signing the Paris Agreement in December 2015, the European Union committed, on behalf of its members, to limiting global warming.
In doing so, one thing quickly became clear: the need to direct investments towards activities that enable an effective transition to a low-carbon economy.
With this in mind, the European Commission communicated its action plan to finance sustainable growth in March 2018. At the heart of this plan was the European taxonomy, or green taxonomy: a tool for defining and precisely identifying economic activities that can be considered “sustainable“.
By adopting the European Green Deal in 2019, Europe set itself new objectives, including achieving carbon neutrality by 2050. These ambitions require an upward revision of investment levels: “at least €1,000 billion” to finance the pact over the next decade. The EU budget would finance more than half of it, bringing other funds in its wake, particularly private ones.
The orientation of financial flows, both public and private, towards “sustainable” activities is therefore more essential than ever. And to guide them in the right direction, the taxonomy is becoming an essential reference.
This is why we propose to decipher it here, with a specific point on its application in the real estate field.
You will find, detailed in this article:
– The European action plan to finance sustainable growth
– The European taxonomy in broad outline
– The “Taxonomy Regulation” and its delegated acts
– European taxonomy: who is concerned?
– What activities are part of the European taxonomy?
– European taxonomy and real estate
The European action plan to finance sustainable growth
The aim of the plan is to provide a new financial framework for Europe, which promotes a more responsible and sustainable economy. That is to say, an economy aligned with:
international climate objectives as defined by the Paris Agreement in 2015 (mainly limiting global warming to less than 1.5°C in 2100 compared to pre-industrial levels),
climate and environmental objectives dictated by the European Green Deal.
This action plan is based on 3 tools, which should help investors direct their funds towards sustainable activities:
- The taxonomy (known as the European taxonomy or green taxonomy): a classification of economic activities that have a positive impact on major climate and environmental issues. In other words, a list of activities considered “sustainable”, including the technical criteria for assessing them as such.
- The European Green Bonds Standard (EGBS): a standard for issuing financial securities, such as green bonds, issued by companies, aligned with the taxonomy and guaranteeing a high degree of transparency (fund allocation report, impact report and verification of compliance with the issuance framework). The stated objective: to combat greenwashing.
- The “Paris-Aligned Benchmark” (EU PAB) and the “Climate Transition Benchmark” (EU CTB). Two benchmark indices intended for financial markets, integrating, based on the work of the IPCC:
- Transition objectives towards a low-carbon economy (continuous decarbonization of 7% per year)
- And quantified GHG reduction objectives in the long term.
The PAB is the most ambitious of the 2 indices, with:
higher reduction thresholds to be achieved in the long term than the CTB (50% vs 30%)
exclusions of all or part of certain sectors (tobacco, weapons, fossil fuels, etc.).
Our article focuses on the taxonomy itself, the basis of the European strategy for sustainable finance.
European taxonomy in broad outline
The European taxonomy proposes a single and transparent classification system to identify “sustainable” economic activities.
It establishes a framework and assessment principles for activities that have an impact on:
- Climate change mitigation,
- Climate change adaptation,
- Sustainable use and protection of aquatic and marine resources,
- Transition to a circular economy,
- Prevention and reduction of pollution,
- Protection and restoration of biodiversity and ecosystems,
Thus, an activity will be considered “sustainable” if it contributes substantially to one of these six objectives, without causing significant harm to one of the other five.
It will also have to comply with social criteria aligned with the OECD and United Nations guiding criteria on business and human rights.
The taxonomy establishes assessment standards and precise thresholds to define what constitutes a sustainable activity. By producing a common benchmark, it allows all economic and political players to speak the same language, and in particular:
- For investors, to build sustainable portfolios,
- For public players, to verify that the funds allocated to climate protection (37% of the European recovery plan) will be injected into activities that will trigger the “European green transition”
and, in general, to avoid reports and speeches tainted with greenwashing.
The “taxonomy regulation” and its delegated acts
The “taxonomy regulation on the establishment of a framework to promote sustainable investments” was voted by the European legislator in June 2020. It entered into force on 12 July 2020, and does not require transposition into national laws.
“Delegated acts” (equivalent to “implementing decrees” in French law) specify the implementation of the taxonomy.
The delegated act of April 2021, for example, concerns the assessment of activities that can meet the challenges of climate change mitigation and adaptation. The construction sector is one of them.
This delegated act will apply from 1 January 2022.
Other delegated acts will follow, allowing in particular the assessment of activities having an impact on the other 4 environmental issues. Their entry into force is planned before the end of 2022.
European taxonomy: who is concerned?
As we have seen, the objective of the taxonomy is to direct investments towards “sustainable” financial products, projects and activities. For private investors, the taxonomy is currently more of a compass than an obligation.
However, it should be noted that Article 8 of the Taxonomy Regulation applies to companies already subject to extra-financial reporting under the Non-Financial Reporting Directive (NFRD). As a reminder, these are public interest entities with more than 500 employees that issue securities – or around 11,000 entities in Europe. These entities will have to publish in particular:
- The share of their turnover coming from products/services associated with activities considered as “sustainable”
- The share of their capital expenditure (CapEx) and operating expenditure (OpEx) linked to assets/processes associated with economic activities considered as “sustainable”
Financial companies will also have to publish these elements applied to:
- Their outstandings (investment companies),
- Their balance sheet (credit institutions),
- Or underwriting portfolio (insurance companies).
Good to know: The latest delegated act proposes to broaden the scope of the entities subject to the NFRD to all public interest entities and listed SMEs. The NFRD would become CSRD (Corporate Sustainability Reporting Directive) and would increase the number of companies subject to the NFRD to 50,000.
Finally, financial products covered by the SFRD (Sustainable Finance Disclosure Regulation) will be subject to specific reporting, depending on the article to which they relate (6, 8 or 9).
What activities are part of the European taxonomy?
Not all activities are intended to be part of the green taxonomy. Let us recall that the aim of this framework is to direct investments towards those that have a positive climate and/or environmental impact. That is to say, those that meet at least 1 of the 6 environmental objectives set out above.
Concerning mitigation and adaptation to climate change, the taxonomy has already assessed 88 activities belonging to the most emitting sectors (including the construction sector). These activities are divided into 3 categories:
- First, “sustainable” activities. That is to say, neutral or low-carbon activities, which respect the thresholds defined in the taxonomy.
- Then, “transitional” activities, for which there is not yet an economically or technologically viable low-carbon alternative, but which can contribute to the transition to a “net zero emissions in 2050” economy. As of today, the taxonomy identifies 21 transitional activities. Building renovation is one of them.
- Finally, “enabling” activities, which allow activities other than themselves to contribute to achieving one of the six environmental objectives (for example, a company specializing in geo-energy). As it stands, the taxonomy designates 24 enabling activities.
European taxonomy and real estate
The delegated act on climate change adopted in April 2021 has been applicable since 1 January 2022. It specifies in particular the technical examination criteria for 4 activities in the real estate sector:
- The construction of new buildings,
- The renovation of existing buildings,
individual renovation measures - And the acquisition and ownership of buildings.
Thus, the act defines as “sustainable”:
- A construction after 1 January 2021, with a primary energy demand at least 10% lower than the threshold imposed by the regulations in force (RT 2012 then RE 2020 as soon as applicable),
a renovated building that can present an energy performance (expressed in primary energy) improved by 30% - A building in operation, built before 2021, in compliance with the BACS decree, and which can present:
- a Class A Energy Performance Diagnostic (DPE), expressed in primary energy.
- Or failing that, being part of the 15% of the national or regional real estate stock that performs best in terms of primary energy consumption.
Thus, in addition to the DPE (Energy Performance Diagnostic) rating and that obtained within the framework of the Eco Energie Tertiaire system (also called the Tertiary Decree), French tertiary buildings will have, from 2022, a third regulatory “green” rating. Let’s bet that this will help to better distinguish green buildings from others.
Beyond the legitimate debates surrounding the definition of what a “green” real estate asset should be, one thing is certain: the right path is that of sobriety.
The less a building consumes, the greener it is.
A trajectory you can choose to take today, with iQspot.
