What you should know about the new EU Taxonomy Regulation
The new EU Taxonomy regulation is intended to create incentives to make capital flows in the EU more sustainable. The experts at TPA know more and will give you the low down here on everything you need to know about the new regulation for more sustainability.
What is the aim of the EU Taxonomy Regulation?
The EU Taxonomy Regulation, which came into force in July 2020, represents the start of the European Commission’s strategy to create a sustainable financial system within the European Union. The Regulation is intended to create incentives to make capital flows in the EU more sustainable, eliminating any lingering doubts of investors with regard to greenwashing (advertising the environmental credentials of a financial product without actually meeting various environmental standards) by ensuring a greater degree of transparency and uniformity, and fostering trust in the sustainability of their investments.
The six environmental objectives of the Taxonomy Regulation
Standardised classification system for sustainable investments. The Taxonomy Regulation stipulates that any business activity needs to display a total of four features to be classified as environmentally sustainable. The key aspect here is that this activity makes a substantial contribution to achieving one of the following six environmental objectives:
Yet by the same token it must not significantly compromise any of these environmental objectives and must ensure that human and labour rights are protected to a minimum standard in accordance with guiding principles applicable in the EU and internationally. Finally, the business activity must meet the technical evaluation criteria defined by the EU.
Climate change mitigation and adaptation
As regards the first two objectives of climate change mitigation and adaptation, the Commission published a draft of such evaluation criteria back in November, which is currently being revised following a consultation phase. The criteria are due to take effect from 1 January 2022.
From sustainability to biodiversity
The criteria for the remaining four environmental objectives, covering aspects ranging from sustainability to biodiversity, are due to be drafted by the Commission by the end of 2021 and which should ultimately apply from 1 January 2023. The Commission should review and, where necessary, revise the technical evaluation criteria at least every three years, with a view to maintaining flexibility and adapting them to changing circumstances and developments.
How will the regulation affect the property industry?
Alternative investment funds (AlF) in the property sector in particular will be affected by the new EU Taxonomy Directive, but only if and to the extent that such a fund or investment made through the fund is labelled as being environmentally sustainable.
Where this is the case, the respective fund manager will in future be required to provide information about the underlying environmental objective and to disclose the extent to which the financial product or investment can be classified as environmentally sustainable and thus to which it is aligned with the taxonomy. The latter is determined for the fund by taking the weighted mean of all taxonomy-compliant shares of the individual properties. Property corporations and companies that issue shares for property funding are under no obligation to apply the EU taxonomy, but are indeed free to do so if they choose.
The are only affected by the Directive if they are required to disclose non-financial information under EU Directive 2013/34/EU. Such companies will be required to disclose the extent to which their business practices are related to environmentally sustainable activities. This means that the requirements of non-financial reporting will be increased.
The good thing is that, if companies already publish a non-financial report, a lot of the groundwork has already been laid. What is important here is that the company’s accounting system is designed in such a way that makes it possible to easily find the necessary information. This applies all the more if a corresponding report has not yet been produced and the existing data therefore have to be filtered to find the requirements.
Which criteria need to be met for taxonomy-compliant buildings?
The technical evaluation criteria for property investments take four different activities into account, relating to
- the renovation of existing buildings;
- individual renovation measures (individual technical procedures and various services aimed at improving the building’s performance); and
- the acquisition and ownership of buildings.
The general benchmark here should be the performance of the top 15% properties in the respective local market. In contrast to the evaluation criteria for other industries, the EU Technical Expert Group for Sustainable Finance (TEG) has not yet developed any absolute thresholds for the building sector. This is due to a lack of data, unequal competitive conditions and different climates in the member states. The European Union’s aim is to define absolute criteria in each market based on the performance of the top 15% properties by the end of 2024.
What needs to be considered during the transition period until 2024?
The following rules that are to apply during the transition period until 2024 are largely based on existing directives and regulations: a newbuild is deemed sustainable if its primary energy demand is 20% below the national Nearly Zero Energy Building (NZEB) standard. Extensive renovations must contribute to achieving the targets set in the EU Buildings Directive.
Alternatively, renovation work is also considered taxonomy-compliant if it results in primary energy needs being reduced by 30%. Separate evaluation criteria apply to individual measures, depending on the area under which they fall. Some measures need to be compatible with the EU Buildings Directive, for instance, while others are automatically considered sustainable, such as installing charging stations for e-vehicles.
Do no significant harm!
An EPC rating of A is required when acquiring a building erected before the end of 2020. The evaluation criteria for newbuilds apply in equal measure to buildings erected from 2021 onwards. In addition to these provisions, DNSH (“Do no significant harm”) criteria have also been drawn up for each of the four areas to ensure that an activity does not have a substantially negative impact on any of the six environmental objectives.
The EU Taxonomy Regulation: what you can do right now.
As the information above shows, there are many individual measures that can vary widely in nature. This means it is definitely worth “labelling” corresponding measures and investments in the accounting system so that they can be found quickly later.
At any rate, the taxonomy itself will continue gaining importance. There will certainly be advantages for companies seeking financing to be taxonomy-certified, as banks will also be required from 1 July 2022 to consider this aspect when assessing requests for financing.
Given the fact that investments in property are always long-term projects, it is essential to address the requirements of the EU Taxonomy Regulation as early as possible. Investors are also attaching ever more importance to having their capital invested in a sustainable way. It may and will indeed be worth taking the criteria into account for investments made during 2021, so as to have a higher number of taxonomy-compliant properties in the portfolio.
This article by our TPA tax experts was first published in the ÖIZ (Austrian Property Newspaper). You can subscribe to it here.