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.

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

  1. ESG - How does the EU Taxonomy Regulation impact the real estate sector?
  2. How does the SFDR impact the real estate sector?
  3. ESG - How does the CSRD impact the real estate sector?
  4. 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.