The EU Taxonomy Regulation; a brief recap
The EU Taxonomy Regulation puts in place a classification system which is aimed at channelling both public and private investments to environmentally sustainable economic activities by establishing criteria for labelling economic activities as ‘green’ or ‘environmentally sustainable’.
As set out in one of our previous blogs, the EU has in this respect defined six environmental objectives which it aims to address in relation to 102 economic activities.
These activities include the following 'real estate-related' activities:
- the acquisition and ownership of buildings;
- the construction of new buildings; and
- the renovation of existing buildings (each an Economic Activity, or together Activities).
To be classified as environmentally sustainable or green under the EU Taxonomy Regulation, an Economic Activity should:
- substantially contribute (SC) to one of the six environmental objectives as outlined in the EU Taxonomy Regulation;
- do no significant harm (DNSH) to the other five environmental objectives;
- meet the so-called ‘minimum safeguards’ such as the UN Guiding Principles on Business and Human Rights to not have a negative social impact; and
- comply with the technical screening criteria (TSC).
The EU Taxonomy Regulation generally defines when an Economic Activity meets the criteria for SC. Also, the general criteria to DNSH have been stipulated in the regulation. Such general criteria have been further detailed in delegated acts in the form of the TSC. In some respects, TSC refer to an Economic Activity meeting certain applicable national regulations.
In light hereof, the below will focus on the TSC applying to the Economic Activities in respect of two of the six environmental objectives, notably ‘Climate change mitigation’ and ‘Climate change adaptation’, including some attention points from a Dutch law perspective.
Substantial contribution to climate change adaptation
Where it comes to climate change adaptation, the relevant delegated act stipulates that the same SC criteria apply in respect of each of the Economic Activities.
Notably, the Economic Activity must have implemented ‘physical and non-physical solutions’ (so-called ‘adaptation solutions’) that substantially reduce the most important physical climate risks that are material to the relevant Economic Activity.
The relevant climate risks that need to be considered, have been prescribed and should be assessed by a person that has a sufficient level of expertise. Note however that no specific qualifications have been prescribed for such advisor or expert, meaning that real estate actors will have some flexibility where it comes to engaging and advisor in this regard.
In relation to the identified potential hazards any Economic Activity must be screened for those hazards which might potentially affect the performance of that activity during its expected lifetime. The climate risk and vulnerability assessment can be proportionate to the scale of the activity and its expected lifespan. For Economic Activities with a lifespan of less than 10 years a more limited assessment is allowed, whereas Economic Activities exceeding 10 years in lifespan require an assessment based on ‘the highest available resolution’, using ‘state of the art climate projections’ across the ‘existing range of future scenarios’ with a scope of at least 10 years up to 30 years for major investments.
By nature, real estate-related activities have quite a long lifespan, and as such we would expect that in most cases the more stringent assessment requirement would apply.
In the Netherlands, the so-called ‘Climate effect atlas’ (Klimaateffectatlas) is available (and recommended) to be used for identifying relevant hazards. Given the specific geological and geographical characteristics of the Netherlands, certain hazards such as ‘permafrost thawing’ or avalanches are unlikely to be relevant. At the same time, some of the water- and temperature-related hazards are highly likely to be (materially) relevant. Large parts of the Netherlands are located below sea-level which will increase potential risks associated with sea-level rises and/or (flash) floods.
Once the relevant physical climate risks and the materiality thereof have been assessed, the last step will be to assess and implement the adaption solutions which substantially reduce the associated risks. As with the above, this constitutes a qualitative test for which no quantitative measures have been prescribed. However, EU-level guidance documents and best-practices documents are available which can be used in this regard.
Substantial contribution to Climate change mitigation
When it comes to the objective of climate change mitigation the delegated act, unlike the TSC criteria in respect of climate change adaptation, stipulates different criteria for each of the respective Economic Activities. These TSC are generally of a more quantitative and specific nature than the above criteria that apply in respect of climate change adaptation. For that reason, the below will address these TSC separately per Economic Activity.
Where it comes to acquiring or owning of buildings, the EU Taxonomy Regulation applicable TSC are based on the type and age of the asset that is being owned or acquired.
If the Economic Activity concerns a building constructed prior to 31 December 2020, such building should either (i) have at least an Energy Performance Certificate (EPC) class A in place, or (ii) should be within the top 15% of the national or regional building stock in relation to its operational Primary Energy Demand (PED). Adequate evidence should be provided in this regard in which the performance of the relevant asset should be compared to the performance of the national or regional stock built before 31 December 2020. Also, this comparison should at least distinguish between residential and non-residential buildings.
Note that this requirement also applies in the event a building was constructed after 31 December 2020 but based on a permit that was applied for prior to that date.
For buildings constructed after 31 December 2020, the building must comply with the technical (energy efficiency) requirements for the construction of new buildings (as set out in the next paragraph).
Under Dutch law, the above entails that at least an energy label in category A (on a scale ranging from A (for very energy efficient buildings) to G (for the least energy efficient buildings) should be available. With respect to the ‘adequate evidence’ that needs to be provided to demonstrate that a building is within the top 15%, no specific (type of) evidencing has been prescribed under the relevant SC and TSC. Such evidence will most likely be based on available data relating to the use of a property and its facilities. This data in itself will generally be generated by users or tenants of the property. Where it (indirectly) relates to individuals, this information may qualify as personal data under the General Data Protection Regulation giving rise to further (privacy) implications and the need for compliance with other (regulatory) requirements.
The energy label A-criterium for taxonomy-alignment is stricter than the energy label requirements pursuant to the Dutch Energy Performance (Buildings) Decree (Besluit energieprestatie gebouwen) and the Dutch Building Code (Bouwbesluit 2012). Generally, owners of certain (types of) buildings in the Netherlands are required to have an energy label available (regardless of its category), with the exception of office buildings for which a requirement applies to have an energy label category C (or better).
With respect to large non-residential buildings (i.e., buildings having an effective rated output exceeding 290 kW in respect of heating systems, systems for combined space heating and ventilation, air-conditioning systems or systems for combined air-conditioning and ventilation), the TSC require such property to be operated efficiently through energy performance monitoring and assessment. This requirement is in line with articles 6.54 and 6.55 of the Dutch Building Code 2012, which require building automation and control systems to be installed for heating and ventilation systems with an effective output of over 290 kW by 2026.
On the construction of new buildings, the TSC stipulate that the PED of such (to be constructed) buildings should be at least 10% lower than the threshold as set for the nearly zero-energy buildings (NZEB) under the implementation of Directive 2010/31/EU. In the Netherlands said implementation has taken place through amendments of the Dutch Building Code.
If an environmental permit application for the initial construction of a building was submitted prior to 31 December 2020 a slightly less strict criterium applies. In such cases compliance can be demonstrated by obtaining an energy label (in conformity with the NEN 7120 standards) indicating a 10% decrease in PED compared to the requirements applicable under the Dutch Building Code.
It is noted that alternative requirements apply to industrial buildings. The ‘BREEAM-NL New Construction 2020 Guidance Note’ includes guidelines and (sample) calculations to assess whether an industrial building is in conformity with the EU regulations or which steps can be taken to achieve this.
With respect to buildings with a gross floor area in excess of 5,000 sq. m, the building should be tested for airtightness and thermal integrity in accordance with specific NEN-EN standards and any deviations in performance or defects in the building shell should be disclosed to investors and clients. Note that post-completion testing of the building shell is not required if traceable and robust quality controls were carried out during the building process.
Renovation of existing building meets the TSC in respect of climate change mitigation if the building complies with the applicable requirements for major renovations.
Pursuant to the Dutch Building Code – in accordance with EU law – construction works should be considered a major renovation if at least 25% of the surface area of the shell of a building is renewed, changed, enlarged, provided that such renewal, change or enlargement concerns the integral shell of the building. In such an event, depending on the specific function of the building involved, the Dutch Building Code prescribes specific (technical) requirements which inter alia relate to minimum levels of thermal insulation for windows and façades.
As an alternative, renovated buildings are considered to be in line with TSC if the relevant renovation works result in a reduction of PED of at least 30%, provided that sustainably generated energy is not factored into this 30% maximum. Also, the relevant renovation works should be completed within 3 years.
Using the EU Taxonomy Regulation
At this stage, compliance with the EU Taxonomy Regulation is largely voluntary. As explained above, the requirements under the EU Taxonomy Regulation in some cases are more stringent than the generic requirements applying to such buildings under Dutch law. Consequently, choosing the right approach to achieve taxonomy-alignment can make a big difference. The Loyens & Loeff Real Estate practice would happily share their experience and market-knowledge to give your real estate asset a sustainable edge in the market.
Other blogs in this series
- ESG - How does the EU Taxonomy Regulation impact the real estate sector?
- How does the SFDR impact the real estate sector?
- ESG - How does the CSRD impact the real estate sector?
- ESG - Green and sustainability-linked loans in the real estate sector
In these blogs, ESG experts from the Loyens & Loeff Real Estate practice group regularly share insights and reflect on ESG topics from a real estate perspective. Together with the ESG focus group with specialists from across our different practice groups and home markets, we combine ESG expertise, project and transactional advice, transaction and litigation experience to enable your success. For more information, please contact one of the members of our Real Estate practice group below.