EU Taxonomy: Construction and Real Estate

The EU Taxonomy Regulation took effect on July 12, 2020, as a component of the European Commission's 2018 Action Plan on Sustainable Finance. It is one element of the EU Renewed Sustainable Finance Strategy that helps companies and investors determine what business activities are sustainable according to their classification system. Its main objective is to aid investors in making sustainable investment decisions. It also helps prevent greenwashing practices. Inevitably, it’s the EU’s goal to incentivize investors to invest in sustainable projects that align with the EU Green Deal.

Although the EU Taxonomy applies to buildings as a whole, many sectors are affected. Real estate is the most eligible sector, energy second, and construction is the third, out of the top three. Energy, real estate, and construction are most aligned, in that order. Therefore, eligibility and alignment factors carry opportunity and risk factors in regard to investments.  

The EU Taxonomy: A breakdown  

Regarding building construction and real estate, the parameters required for the EU Taxonomy are climate change mitigation, climate change adaptation, and contribution to the circular economy, but still can do no harm to the additional criteria. The EU also offers a set guide as to what each parameter permits and what to avoid in each of the six criteria in order to do no harm. 

The Technical Screening Criteria (TSC) that meet the EU Taxonomy are:

1. Climate change mitigation
2. Climate change adaptation
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

The four criteria that make activities qualify for the EU Taxonomy are:

1. Make a substantial contribution to one of the six activities
2. Do no harm to the other five objectives
3. Comply with the minimum safeguards
4. Comply with the technical screening criteria according to the Taxonomy delegated acts

Those who are subject to the Corporate Sustainability Reporting Directive (CSRD) should disclose what is in alignment with the EU Taxonomy. Those not subject to the CSRD can report voluntarily. This will empower organizations to be eligible for sustainable finance. 

Section 7 of the TSC: EU Taxonomy economic activities for construction and real estate

These seven activities must be compliant with the EU Taxonomy. The most frequently selected activities for the construction and real estate sectors so far are the construction of new buildings, renovation of existing buildings, and the acquisition and ownership of buildings. 

1. Construction of new buildings
2. Renovation of existing buildings
3. Installation, maintenance, and repair of energy-efficient equipment
4. Installation, maintenance, and repair of charging stations for electric vehicles in buildings (and parking spaces attached to buildings)
5. Installation, maintenance, and repair of instruments and devices for measuring, regulating, and controlling the energy performance of buildings
6. Installation, maintenance, and repair of renewable energy technologies
7. Acquisition and ownership of buildings

Here is a brief summary of each of the EU Taxonomy economic activities below:

1. The EU Taxonomy and the construction of new buildings

The building will have to display very low energy usage, (10% lower than the threshold set for the nearly zero-energy building (ZEB) requirements in national measures) and an Energy Performance Certificate (EPC) as a verification. They should also exhibit physical and non-physical adaptations to climate change. This can be evaluated with a risk and vulnerability assessment. For buildings over 5000m2, the life cycle global warming potential is calculated and the level of performance is tested after construction, and then disclosed to stakeholders.

2. The renovation of existing buildings

The renovation requires a reduction of primary energy demand (PED) of at least 30%. The reductions in the net PED through renewable energy sources are not taken into account and can be done over the course of three years. 

3. Installation, maintenance and repair of energy-efficient equipment

There are two criteria: first, they meet the minimum requirements outlined for individual components and systems as per the relevant national measures implementing Directive 2010/31/EU. Second, the installation involves enhancing insulation in existing envelope components, such as external walls (including green walls), roofs (including green roofs), lofts, and basements; upgrading existing windows or doors with new energy-efficient alternatives; implementing energy-efficient lighting solutions; and carrying out the installation, replacement, maintenance, and repair of HVAC and water heating systems with highly efficient technologies.

4. Installation, maintenance, and repair of charging stations for electric vehicles in buildings (and parking spaces attached to buildings)

Regarding climate change adaptation, buildings must meet the following criteria as long as buildings aren’t used for extraction, storage, transport, or manufacture of fossil fuels. The building does not lead to a lock-in of assets that undermine long-term environmental goals, considering the economic lifetime of those assets; and has a substantial positive environmental impact, based on a life-cycle assessment.

5. Installation, maintenance, and repair of instruments and devices for measuring, regulating, and controlling the energy performance of buildings

This economic activity includes measures such as installation, maintenance, and repair of zoned thermostats, smart thermostat systems and sensing equipment, including motion and daylight sensors; building automation and control systems, building energy management systems (BEMS), lighting control systems and energy management systems (EMS); smart meters for gas, heat, cooling, and electricity; and façade and roofing elements with solar shading or solar control functions, including those that support growing vegetation.

6. Installation, maintenance, and repair of renewable energy technologies

This involves measures such as the installation, maintenance, and repair of solar photovoltaic systems and the ancillary technical equipment; solar hot water panels and the ancillary technical equipment; wind turbines and the ancillary technical equipment; heat exchanger or recovery systems.

7. Acquisition and new ownership of buildings

The EU taxonomy requires that buildings built before 31 December 2020 have at least an EPC of class A to significantly contribute to climate change mitigation. Properties that belong to the top 15% of the national or regional building stock expressed as operational PED are also considered sustainable. Regarding buildings constructed after 31 December 2020, the building must follow the criteria set for new buildings at the time of purchase. Additionally, large non-residential buildings with a heating and ventilation, and air-conditioning system (HVAC) output over 290kW are considered to be operated efficiently through energy performance monitoring and assessment.

To conclude

The data required for verifying and reporting on the EU Taxonomy economic activities requires structured, accurate data collection and a government-compliant reporting system for applicable companies. 

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