Sustainable Real Estate

Definition

Sustainable Real Estate is the construction and operation of Real Estate that is compatible with long-term sustainability objectives

In the EU, buildings are effectively the largest energy consuming sector, responsible for around 40% of energy consumption and 36% of carbon emissions. Three-quarters of the European building stock is considered inefficient, but renovation rates remain very low, around 1% per year. Annual rates of new construction resulting in buildings with higher performance levels differ across EU Member States but are generally estimated to be around 1-2%, clearly inadequate to set the whole sector on a zero-emissions pathway.

Given that building emissions are heavily dependent on the carbon intensity of the grid, the TEG acknowledges that it is necessary to look at both energy demand and GHG emissions as metrics to evaluate a building’s performance. However, feedback received through consultation with financial institutions and developers has shown that, in practice, the majority are not ready to use GHG emissions metrics to assess the performance of their activities and assets. Against this background, the TEG has decided to adopt a transitional approach based on the initial decision to use energy metrics, which will be extended to include GHG emissions once sufficient data for the latter is available.

The TEG acknowledges that sector emissions are not only caused throughout a building’s operational phase but that significant emissions are generated during the extraction, manufacture and transport of building materials, as well as during the construction process and through the end-of-life demolition process. Due to current whole life cycle GHG emissions data constraints, the TEG chose to focus on the operational phase. However, the TEG strongly recommends the establishment of additional GHG emissions thresholds once more robust data becomes available.

Subjects covered

The TEG has focused on four individual economic activities, enabling the Taxonomy to establish mitigation criteria that are consistent with and relevant to a large group of real estate market participants and can maximise investment flows to mitigation actions within the building sector. Consistency of the criteria across the four activities should be maintained once absolute thresholds are established.

Economic activities

1. Construction of new buildings: This activity covers real estate development and enables accounting project capital expenditures of construction clients and the equity/revenues of developers and construction companies as eligible under the Taxonomy.
2. Renovation of existing buildings: This activity includes both relative improvements (30% against baselines) and comprehensive interventions on buildings and enables accounting project capital expenditure of renovation clients (including renovation costs unrelated to energy efficiency measures) and the equity/revenues of renovation companies as eligible under the Taxonomy.
3. Individual renovation measures, installation of renewables on-site and professional, scientific and technical activities: This activity covers a) single technical interventions, enabling the accounting of project capital expenditure of clients (including only costs related to the eligible measures) and the equity/revenues of installation companies; and b) services functional to building performance improvement, enabling the accounting of project capital expenditure of clients and the equity/revenues of companies offering such services as eligible under the Taxonomy.
4. Acquisition and ownership of buildings: This activity covers the purchase of buildings, building ownership and improvement from an asset perspective and enables accounting project capital expenditure (related to the acquisition) and the revenues/equity of the owner as eligible under the Taxonomy. This activity covers portfolios and real estate trusts.

The criteria established for building acquisitions follow the same rationales as the construction of new buildings and the renovation of existing ones. Future iterations of the Taxonomy should maintain this alignment within building-related activities and the associated level of ambition by updating the criteria for building acquisitions in accordance with the changes that will be introduced in the criteria for new construction and renovation.

Setting criteria and thresholds

As a principle, the TEG agreed that the Taxonomy should recognise energy- and resource-efficient and low-GHG emission buildings as eligible under the mitigation criteria, considering as a minimum benchmark the top performing 15% of the stock as representative of the best level of energy and resource efficiency that can be achieved in a local context. To reflect the level of ambition for the Taxonomy, this percentage will subsequently be tightened to set the sector on a net-zero carbon trajectory by 2050.

The TEG has faced several challenges setting criteria for the buildings sector:

1. The lack of consistent data across countries for benchmarking building stock performance and for setting suitable thresholds for the ‘best in class’ top performing layer of the stock.
2. The inherent difficulty of creating a level playing field across countries with different climates and degrees of market readiness.
3. Barriers to the establishment of transitional thresholds that will work across Member States, cognisant of varying levels of ambition and rigor regarding the implementation of NZEBs and EPCs.
4. The need to find a compromise between ambition and the desire to build upon already existing ‘green’ financing instruments.
5. The current inability of significant parts of the market to operate with GHG emission metrics.

Against this background, for the time being the TEG chose to adopt existing EU policy instruments as proxies for thresholds and metrics. It recommends reviewing these thresholds as soon as possible and undertaking work to establish suitable absolute thresholds for each EU Member State as soon as possible.

Considering the practical implications in demonstrating Taxonomy eligibility, DNSH criteria have been established to ensure minimum safeguards across the building life cycle by adopting EU and international standards.

Market coverage

With the exception of buildings related to fossil fuel activities, the Taxonomy does not exclude any building or renovation type, and therefore covers virtually the whole market for construction and real estate activities. This does not mean that every activity will be eligible, only that any participant in the market can be eligible. In its current formulation, the Taxonomy criteria will impact EU Member States differently and the share of the market eligible under the Taxonomy criteria will vary from location to location due to the varying levels of ambition underlying NZEB requirements and EPC ratings. In practice, this means that during the transitional period, meeting the eligibility criteria would be easier for some Member States. However, once absolute thresholds are identified through benchmarking the performance of the top 15% of each national building stock, a more consistent level of ambition can be established across all Member States.

Outside the EU, the share of the market that could be eligible will also vary from country to country. Countries with ambitious building regulations that are accepted as Taxonomy-eligible will more easily be able to make large shares of their market eligible. However, the 30% improvement rule relative to baseline performance will not only facilitate immediate functionality of the Taxonomy outside the EU, it will also make a significant part of renovation activities eligible, even in countries where national building regulations may not be ambitious enough. In addition, outside the EU, the share of the market that could be eligible will also depend on the local proliferation of Taxonomy-eligible sustainability certification schemes.