In the face of the climate emergency and the challenge of reaching carbon neutrality by 2050, the European Union has decided to leverage sustainable finance to achieve its ambitions.
Two documents have been implemented to reform the financial system and benefit the economy by integrating ESG issues in the long term.
These are, the SFDR – the first phase of which came into force in March 2021, and the Taxonomy – which will begin to apply in 2022.
Reminder about the SFDR
The SFDR (Sustainable Finance Disclosure Regulation) aims to provide more transparency regarding social and environmental responsibility for financial markets, and to limit greenwashing. It aims to ensure the comparability of products and to direct the flow of private capital towards more sustainable investments.
The SFDR regulation classifies financial products into 3 categories according to their sustainability characteristics:
- Article 6 products do not have a sustainability objective
- “Light green” products under Article 8 incorporate environmental and/or social features, such as monitoring energy consumption or GHG emissions
- “Dark green” products governed by Article 9 demonstrate a sustainable investment objective, such as reducing GHG emissions in line with the Paris Agreement
For products covered by Articles 8 and 9, it will be necessary to publish the “green share” of the product, in other words, the extent to which it is aligned with the Taxonomy as part of the annual reporting.
What about the Taxonomy?
The Taxonomy is a powerful tool that provides all stakeholders, particularly financial players, with a common framework and understanding of what is and is not sustainable. It categorizes activities according to their environmental externalities and measures the impact of these activities on 6 environmental objectives using set criteria, as well as minimum performance thresholds for the characterisation of activities as “green”.
The TEG (Technical Expert Group), a group of 35 experts named by the European Commission, has published a first version of the European Taxonomy focusing on the first two objectives. These criteria, concerning climate change mitigation and adaptation objectives, were formalized on 7th January 2021, and implemented as of 1st January 2022. The second delegated act, concerning the four other environmental objectives (circular economy, biodiversity, protection of water resources and prevention of contamination) will be adopted in 2022.
Climate focus for the real estate sector
Regarding the real estate and buildings sector, several activities have been taken into account, including construction, renovation, acquisition and management of buildings and individual measures. Specific criteria regarding Taxonomy alignment and climate change mitigation and adaptation objectives have been drawn up for these activities.
As for property acquisition and management, the Taxonomy criteria are as follows:
- Buildings constructed before 2021 will have to demonstrate an energy performance certificate rating of “A” (50 kWh/m²/year in France) or be in the top 15% most energy efficient buildings in their area.
- Buildings constructed after 2021 will have to demonstrate energy consumption at least 10% lower than the NZEB (Nearly Zero Energy Building) standards of their respective countries.
Taxonomy is not limited to climate
To date, only the criteria for the two climate objectives have been formally adopted. A new delegated act on the remaining 4 environmental issues should be adopted in 2022 according to the expert committee report published in August 2021.
Regarding property management, this preliminary report recommends the adoption of criteria surrounding the biodiversity protection objective only. The text outlines the establishment of several criteria such as the share of green and permeable exterior surfaces, the installation of biodiversity infrastructure (artificial nesting boxes for bats and birds, habitats for insects, etc.) and the monitoring of a site biodiversity management plan. The property management sector should not be concerned by the other categories of environmental issues.
In the interest of relevance, the Taxonomy will be reviewed every three years to respond to changes concerning the climate emergency in connection with the development of new technologies.
What to remember
In conclusion, the European Taxonomy represents a real opportunity for real estate actors that wish to attest to their commitment to environmental transition based on a shared benchmark. From now on, thanks to this common reference for sustainable activities, market actors will be able to monitor and publish standardized indicators that will enable them to compare ESG performance and set objectives.
See also: GRESB
Two key dates to remember
- 1st January 2022: First publication of the Taxonomy alignment rate for products covered by Articles 8 and 9 of the SFDR. This concerns climate topics (mitigation and adaptation to climate change).
- 1 January 2023: Publication of the taxonomy alignment rate extended to the 4 other environmental objectives, again for products concerned by articles 8 and 9 of the SFDR.