Embarking on an ambitious common climate framework

Thu 03 Mar 2022

As part of the European Green Deal, the European Union intends to encourage green investments and prioritise the revision of the Non-Financial Reporting Directive (NFRD). The European or Green Taxonomy, which sets out a precise classification of sustainable activities with the strategic objective of redirecting capital flows towards those activities from 2022, is a result of this process. Currently, there are six environmental objectives, with two applicable now to the real estate sector: climate change mitigation and adaptation to climate change. New regulatory deadlines are to be expected from 2023 onwards, but the implementation of this first stage will already represent a major effort for companies, including those in the construction macro-sector.

Issues already facing the real estate sector

The first lever requires economic actors to position themselves within the European transition framework. This consists of moving from an activity considered “eligible” to an activity considered “aligned”. This first lever is based on four criteria: making a substantial contribution to one or more of the environmental objectives; do no significant harm (DNSH) to any of the environmental objectives; being carried out in compliance with the OECD, UN and ILO guidelines on human rights; and compliance with the technical review criteria.

The second lever defines a grid to allow investors to identify the activities that contribute most to the transition. This requires the publication of both quantitative and qualitative data. Firstly, financial indicators such as shares of turnover, CAPEX and OPEX allocated to eligible and aligned activities. Secondly, the list of eligible and non-eligible activities, the methodology for identifying them and an explanation of the calculation method. For example, this covers aspects such as “renovation of existing buildings” or “social and medical accommodation”. In this respect, the multiplication of labels for buildings or investment funds is already contributing to a shift towards eligible practices and assets.

A difficult gap to bridge

Certain areas of debate remain. In particular, DNSH has a very broad scope of application. Furthermore, the share of energy efficient assets is still low, especially in the most sought-after categories such as residential and office. This leads to significant costs for energy efficiency improvements or portfolio diversification.

Lastly, despite the emergence of strategic ESG departments supporting professionals in terms of both controls and innovation, the majority of players do not yet have the internal resources to meet the new European requirements. In this context, using consultants or outsourcing reporting is common and seems likely to increase.

Key points:

• Anticipate upcoming European regulatory deadlines on environmental, social and governance matters
• Promote eligible activities in the construction macro-sector through significant efforts to reduce greenhouse gas (GHG) emissions
• Democratise the methods and criteria required for the Taxonomy as quickly as possible among property companies