EU taxonomy regulation for buildings

POSITION | ENERGY AND CLIMATE | BUILDINGS

EU taxonomy regulation for buildings Implementable, open to technology and unbureaucratic

24 August 2021 Summary Making the taxonomy implementable, open to technology and unbureaucratic Within the framework of Sustainable Finance, the EU Taxonomy Regulation is a transparency instrument of the EU Commission, which is intended to show investors and companies the impact of their portfolio or investments on the climate and the environment. In its current form, however, the taxonomy is difficult to implement and would impose a bureaucratic burden on companies.

Optimize Technical Screening Criteria (TSC), expand economic activities TSCs must be designed in such a way that they can be realistically implemented for the building sector. Furthermore, the list of economic activities that can contribute to the six climate goals must be expanded.

Realistic development of the "Do-No-Signifcant-Harm" (DNSH) principle In Germany, the documentation and proof of DNSH compliance would mean a disproportionate effort for property owners/asset managers, especially since a large part of the relevant data for the fulfilment of the water, pollutant or waste verification obligation has no basis in German laws or standards.

Avoiding financing and investment barriers for refurbishment and new construction The manifold effects of the EU taxonomy are not foreseeable for companies and investors in the building sector. We therefore recommend that the EU taxonomy be sufficiently tested in order to avoid financing and investment barriers for refurbishment and new construction.

Michael Wolfram | BDI Initiative "Energy-Efficient Buildings" | T: +49 30 2028-1207 | M.Wofram@ieg.bdi.eu | www.bdi.eu

EU taxonomy regulation for buildings

Table of Contents Classification Sustainable Finance and the EU Taxonomy ............................................................ 3 Evaluation of the EU taxonomy ......................................................................................................... 4 Optimize Technical Screening Criteria (TSC) and create valid data basis for taxonomy compliance .. 4 Expanding economic activities .............................................................................................................. 5 Realistic design of the Do-No-Significant-Harm principle ..................................................................... 5 Avoiding financing and investment barriers to refurbishment and new construction ............................ 5

Imprint...........................................................................................………………………………………7

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EU taxonomy regulation for buildings

Introduction Sustainable Finance and the EU taxonomy Sustainable Finance plays a key role for the EU in mobilising the capital needed to achieve the policy objectives of the Green Deal and international climate policy. Investment is to be channelled into a resilient economy and recovery from the effects of the COVID 19 pandemic is to be made sustainable.

The EU believes that setting environmental, social and governance (ESG) criteria will lead to increased longer-term investment in sustainable economic activities and projects. The detailed design and definition of ESG criteria is being discussed by the "Sustainable Finance Platform".

Environmental aspects can relate to climate change mitigation and adaptation, as well as to the wider environment, such as biodiversity conservation, pollution prevention and the circular economy, within the ESG criteria. The governance of public and private institutions, including management structures, employee relations and executive compensation, plays a fundamental role in ensuring that social and environmental considerations are integrated into the decision-making process. The Sustainable Finance Platform is discussing how to further define the criteria.

In the context of Sustainable Finance, the EU taxonomy is a classification system that regulates whether an economic activity is to be classified as environmentally sustainable. The regulation ((EU) 2020/852) entered into force on 12 July 2020 and defines six environmental objectives, each of which is subject to a separate Delegated Act as a Level 2 provision.

The taxonomy defines an economic activity as environmentally sustainable if it makes a positive contribution to one of the six EU objectives: ▪

Climate Protection,

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Adaptation to climate change,

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sustainable use and protection of water and marine resources,

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Transition to a circular economy,

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pollution prevention and control; and

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Protection and restoration of biodiversity and ecosystems

does not significantly harm any of the six other environmental objectives ("Do No Significant Harm"/DNSH) and complies with minimum social standards ("Minimum Social Safeguards"/MSS).

In addition to sustainable economic activities, there is the classification as a supporting activity or a transformation activity. Supporting economic activities here refer to the potential of the sector to enable significant emission reductions in other sectors. An example is investment in the expansion of the energy network. Transformation activities are considered sustainable provided that no low-carbon alternatives are available, they meet clear requirements and promote the transition to climate neutrality in line with EU climate targets. Minimum requirements in the form of thresholds are defined for this purpose.

Assesment of the EU taxonomy The EU taxonomy is intended to provide clarity for investors and companies and show whether investments have a positive impact on the climate and the environment. To this end, the criteria of the 3

EU taxonomy regulation for buildings

taxonomy will also be applied in the EU Green Bond Standard and in sustainability labels such as the Sustainable Finance Eco-Label. According to the Commission, the regulation is not intended to set minimum standards, prohibit economic activities or restrict financing options, but to create new financing options for sustainable economic activities. The BDI expressly supports this objective, but it must still be stated that there is still a considerable need for optimisation in the buildings sector:1 ▪

The Delegated Acts on Climate Targets 1 and 2 do not list all the necessary economic activities that make a positive contribution.

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Technical thresholds that are too narrow for application limit the realistic application of the taxonomy.

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The data basis for determining the "Do-No-Significant-Harm" criterion is unclear or non-existent.

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Evidence is required which has already been checked within the framework of statutory regulations, e.g. in the case of building permits, which leads to unnecessary additional bureaucratic work.

The BDI is therefore calling for the taxonomy for the building sector to be designed in such a way that it can be implemented, is open to new technologies and is unbureaucratic.

Optimize Technical Screening Criteria (TSC) and create valid data basis for taxonomy compliance Clear, affordable and reliable requirements with a scientific basis are a key prerequisite for stimulating sustainable investment in the building sector.2 Criteria that have already been proven, for example, by legal provisions or (building) permits should be recognised as proof within the framework of the taxonomy in order to avoid additional bureaucratic burdens for the economy and companies. Furthermore, it must be ensured that no unreasonable additional costs arise in relation to data collection and that recognised instruments already exist for the provision of evidence. 3 The principle of economic efficiency must be applied here (detailed proposals are set out in Annexes I and II). The Technical Screening Criteria should therefore be adapted and the taxonomy conformity should be placed on a valid data basis.

Expand economic activities

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German Sustainable Finance Strategy (2021), p. 22

2

Study results from 11 European countries across 62 projects and building types show that it is difficult for market participants to demonstrate full taxonomy compliance. This is attributed to the high level of requirements of the criteria as well as the lack of data. Buildings assessed against the 'acquisition' and 'ownership' characteristics were mostly not taxonomy compliant when both the 'climate change mitigation' and 'DNSH' criteria were considered. Of the 62 projects analysed, only one Danish project evaluated against the TEG criteria for acquisition and ownership was found to be fully taxonomy compliant. For more information see: DGNB et al. (2021): EU Taxonomy Study - Evaluating the market-readiness of the EU taxonomy criteria for buildings, March 2021, https://static.dgnb.de/fileadmin/dgnb-ev/downloads/publikationen/EU-Taxonomy-Study_2021.pdf 3

The availability, comparability and quality of data is also proving to be extremely difficult. Accordingly, neither insurers nor banks currently have a valid data basis for assessing taxonomy compliance and must resort to estimates, which can lead to imprecise statements. For more information, see: EBF (2021): Testing the application of the EU Taxonomy to core banking products: High level recommendations, January 2021

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EU taxonomy regulation for buildings

Not all relevant NACE codes have been included in the Technical Screening Criteria or considered by the Technical Expert Group. However, according to paragraph 45 of the Taxonomy Regulation (EU) 2020/852, "[...] certain economic activities should not be unduly disadvantaged compared to other economic activities, provided that both contribute to the environmental objectives to the same extent." In this respect, there is a risk of economic disadvantage and the potential success of the taxonomy is reduced.4 The list of sustainable activities should be expanded accordingly and any exclusion should be substantiated scientifically. Detailed proposals for the expansion of economic activities are given in Annex I and II.

Realistic design of the "Do-No-Significant-Harm" principle The "Do-No-Significant-Harm" (DNSH) principle applied in the taxonomy defines criteria for demonstrating that other taxonomy objectives are not compromised. The requirements must be adapted in such a way that they can be fulfilled in the building sector in terms of levels and implemented in practice.

In Germany, the documentation and proof of DNSH compliance would mean a disproportionate effort for real estate owners/asset managers, especially since a large part of the relevant data for the fulfilment of the water, pollutant or waste verification obligation has no basis in German laws or standards.

Therefore, a harmonised legal basis and thus a substantial change of the current legal framework would be necessary to enable compliance with the taxonomy rules and to ensure competitiveness.

Avoiding financing and investment barriers for refurbishment and new construction The taxonomy aims to create transparency for investors and companies, but is at the same time very static and in some points, as described above and in Annex I/II, not yet very mature. Nevertheless, the EU Commission is already planning to extend its application to other areas and to add a social or brown taxonomy.5 Here, BDI suggests for buildings that the taxonomy should first be sufficiently tested in practice and weaknesses remedied before it is extended to other areas, as the consequences for companies and investors are not foreseeable.6 In this way, practicability can be ensured, additional bureaucratic burdens avoided and possible investment obstacles in new construction and refurbishment prevented, and the taxonomy strengthened as a successful transparency instrument.

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Recital (45) in: Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 establishing a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088.

5

For example, the DNSH principle laid down in Article 17 of the Taxonomy Regulation is applied to the examination of national reconstruction plans (Recovery and Resilience Facility) via a so-called "Technical Guidance Document", without there being a Delegated Act and Technical Screening Criteria. Furthermore, this principle is to be applied in the audit of the EU regional, cohesion and social funds for the period 2021 - 2027 as well as the Horizon Europe research programme. The EU taxonomy can also be used in European funding programmes (InvestEU) or in national funding programmes related to green projects or investments such as KfW. For more information see: European Commission (2021): FAQ on Taxonomy, p. 9ff.

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It is feared that the EU taxonomy in its current form may restrict financing and investment in new construction and renovation, as it is already applied by credit institutions and insurance companies. This would be counterproductive in view of the target of climate neutrality by 2045, the wave of renovations envisaged by the Commission and the housing shortage in major cities.

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EU taxonomy regulation for buildings

Imprint Federation of German Industries – BDI Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0

Editorial Michael Wolfram T: +49 30 2028-1704 M: m.wolfram@ieg.bdi.eu Wilko Specht T: +49 30 2028-1599 M: w.specht@ieg.bdi.eu

Document number: D 1446

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