The EU Taxonomy for sustainable activities is a classification system, arising from the EU Taxonomy Regulation, that aims to help investors, companies, and policymakers identify which economic activities can be considered environmentally sustainable. It is a key building block of the European Green Deal.
In June 2021, the European Commission published the text of the EU Taxonomy Climate Delegated Act, establishing technical screening criteria (TSC) to determine the conditions under which an economic activity qualifies as a substantial contribution to climate change mitigation or climate change adaptation and whether that economic activity causes no significant harm to any of the other environmental objectives.
Annex I of the Act focuses on the TSC related to the substantial contribution to climate change mitigation and the principle of ‘do no significant harm’ regarding different activities.
The building sector is one of the areas covered by the Annex (section 7). More specifically, Annex I of the Climate Delegated Act sets out specific criteria for real estate activities to qualify as sustainable according to the EU Taxonomy.
At the end of December 2022, the European Commission published Questions and Answers to clarify a number of issues related to the interpretation of the Climate Delegated Act.
The ENGAGE templates, based on the ESMA reporting standards for residential mortgage-backed securities (RMBS), include a number of fields related to EU Taxonomy requirements and in line with the logic of the TSC.
In particular, the ENGAGE templates apply the logic of the Climate Delegated Act to mortgages and home renovation loans in three areas:
The Climate Delegated Act describes the activity of “construction of new buildings” as the development of building projects for residential and non-residential buildings by bringing together financial, technical, and physical means to realise the building projects for later sale as well as the construction of complete residential or non-residential buildings.
Construction activities can contribute substantially to climate change mitigation if they meet certain thresholds for resources efficiency. For example, new buildings must have a primary energy demand that is at least 10% lower than the level required by national regulations for Nearly Zero-Energy Buildings (NZEBs). Table 1 provides an overview of the substantial contribution criteria (SCC) for the construction of new buildings.
The requirement for the relevant activity to be regarded as Taxonomy aligned is that The Primary Energy Demand (PED), defining the energy performance of the building resulting from the construction, is at least 10% lower than the threshold set for the NZEB requirements in national measures implementing Directive 2010/31/EU of the European Parliament and of the Council.
The PED is defined by the Climate Delegated Act as the calculated amount of energy needed to meet the energy demand associated with the typical uses of a building expressed by a numeric indicator of total primary energy use in kWh/m2 per year and based on the relevant national calculation methodology and as displayed on the Energy Performance Certificate (EPC).
As a consequence, the data fields requested in ENGAGE Templates for the calculation of taxonomy alignment with the TSC under section 7.1 of Annex 1 of the Climate Delegated Act include:
Another type of real estate activity covered by the EU Taxonomy is renovation of the existing building stock. The Climate Delegated Act describes the activity “renovation of existing buildings” as construction and civil engineering works or preparation thereof.
Renovation activities can contribute substantially to Climate Change Mitigation if they achieve a certain level of energy savings or emission reductions. For example, renovation projects must achieve at least a 30% decrease in (fossil) prime energy demand. The initial PED and the estimated improvement are based on a detailed building survey, an energy audit conducted by an accredited independent expert or any other transparent and proportionate method and is validated through an EPC.
The 30 % improvement results from an actual reduction in PED (where the reductions in net primary energy demand through renewable energy sources are not taken into account) and can be achieved through a succession of measures within a maximum of three years. Table 2 provides an overview of the SCC for the renovation of existing buildings.
A third type of real estate activity covered by the EU Taxonomy is building acquisition and ownership. Building acquisition and ownership can contribute substantially to climate change mitigation if it meets certain criteria for energy performance. Table 3 provides an overview of the SCC the of existing buildings.
The Climate Delegated Acts differentiates between recent buildings (built after 31 December 2020) and old buildings (built before 31 December 2020).
For old buildings, the requirement for Taxonomy alignment consists in:
For recent buildings, the requirement for Taxonomy alignment is as per that for the construction of new buildings (see above).
As a consequence of the requirements for each category of building (recent, old), the ENGAGE templates request the following data fields to enable the Taxonomy alignment check according to the section 7.7 of Annex 1 of the Climate Delegated Act:
In addition to the TSC, the EU Taxonomy Regulation introduces two new concepts for Taxonomy alignment. One of these concepts is the “do no significant harm” (“DNSH”) principle, mentioned in Article 3(b) of the EU Taxonomy Regulation, which means that an activity that contributes substantially to one environmental objective must not significantly harm any other environmental objectives listed in Article 9 of the Regulation.
Another concept introduced by the EU Taxonomy Regulation is the “minimum safeguards” from Article 18, which means that an activity must comply with certain social and governance standards to be considered sustainable. For example, an activity must comply with certain human rights, and anti-corruption standards, among other things, if the economic activity is carried out by an undertaking.
The DNSH and minimum safeguards requirements are also included in the ENGAGE Templates.
If you would like to learn more about the ENGAGE templates and would like to have a say in their development, please send an email to engage4esg@eurodw.eu.
To achieve the proposed 55% emission reduction climate target by 2030, around EUR 275 billion of additional investments are needed per year.
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