"The taxonomy has allowed the EU to take important steps forwards in terms of sustainability in the finance and real estate industry. This makes it all the more important that this step is well thought through – and that the issues, requirements and objectives are defined properly," says DGNB CEO Dr Christine Lemaitre. "The idea of our study was to look at actual projects throughout Europe to find out if the criteria as they currently stand have the potential to become a meaningful tool for transformation in the first place, or whether they miss the mark in terms of offering an opportunity to the market."
Joint study by four European Green Building Councils
The study was conducted by the DGNB in partnership with the Green Building Council España (GBCe), the Austrian Sustainable Building Council (ÖGNI) and the Green Building Council Denmark (DK-GBC). It was based on the first version of the taxonomy criteria published in March 2020. The classification system for sustainable investments was developed by the EU to establish a classification system for financial products and investments that make significant contributions to environmental goals, for example through climate protection or adaptations to climate change, in such a way that they may declare themselves to be 'sustainable' in environmental terms. In the real estate market, this affects criteria applied to new buildings, renovations and the acquisition and ownership of buildings.
The aim of the study was to examine whether the taxonomy criteria are market-ready and can be applied to actual projects. As well as assessing how well prepared the real estate and financial sectors are for the topic, the study also aimed to understand the extent to which these sectors will need to expand their capacity in order to include procedures of taxonomy administration in their current processes. It also hoped to gather a realistic impression of front-line experience when it comes to the time and effort involved, costs, but also the benefits of introducing the necessary systems for collecting data. A further point that was investigated was the extent to which existing certification systems add value when it comes to meeting new requirements and simplifying documentation. In addition, the goal was to submit concrete recommendations to the EU Commission for further development of the criteria.
To assess the taxonomy criteria, they were applied to actual projects last autumn. Of the 62 buildings that were studied, 36 were scrutinised with the 'acquisition and ownership' criteria, 22 with the new construction and four projects with the renovation criteria. Separate questionnaires were used for each of these three areas. The projects spanned 23 different companies. These included seven project developers, six pension funds and six investment and asset managers. Some of the survey participants already possessed detailed knowledge of the taxonomy system; for others it was a new topic. 26 of the projects had undergone certification.
The key problem faced by market stakeholders: the lack of data
One of the detailed findings of the study overall was that only one of the 62 projects was able to comply fully with the taxonomy requirements for all criteria. This was partly due to difficulties actually meeting requirements laid down under the criteria. In many cases, however, the survey participants also lacked the foundation of information required to provide the necessary evidence. In addition, major differences were experienced with the projects involved in the study. Whereas more than half of the projects involving new construction met at least two-thirds of requirements, less than 15 per cent of the projects involving 'acquisition and ownership' were able to do so. There is a lot of catching up to do here in terms of information-gathering, especially when it comes to purchasing processes and asset management. The criterion for Climate Change Mitigation proved particularly problematic for those 'acquisition and ownership' projects. In terms of the actual content and context of requirements, the criterion for Climate Change Adaptation was the most difficult to fulfil – across all types of buildings.
Certified projects find it easier in terms of criteria fulfilment and resource investment
The data gaps identified for almost all projects were particularly conspicuous for residential buildings and larger properties. Commercial property and smaller buildings already possessed a better foundation of data. It was noticeable that certified buildings were more likely to be able to demonstrate compliance – i.e. they were better prepared for the taxonomy requirements. The time required to complete the assessment varied widely, from 2 to 25 hours per project. Here, too, certified buildings were at an advantage in comparison to non-certified buildings. They are also better prepared when it comes to the systems and processes required to provide documentation for the taxonomy.
"The study shows that the industry has neglected the issue of transparency for too long," states Lemaitre. "Certification allows us to capture information that should be available anyway and it's important for assessing sustainability standards. So in that respect, this finding of the study is good news for everyone who's been involved in certification for some time. They already have a head start, whereas the others will have to catch up."
EU Commission will need to tighten up certain criteria
The study showed that the current taxonomy criteria provide a good foundation, but further work is still required to ensure they can actually be applied in practice and that they are suitable for the market. There were a number of issues that simply could not be addressed yet. "When highly motivated people are working on projects and they've already taken a whole host of sustainability requirements into account, but still have problems working through them and providing evidence, it shows that a lot of work is still needed to develop the criteria," states Lemaitre. "The EU has a special responsibility in this respect to define guidelines in a clear way. It has to be ensured that the guidelines are fundamentally implementable, and the whole topic should be made as manageable as possible to avoid unnecessary effort just working through the criteria," states Lemaitre.
Based on an initial assessment of the study, concrete recommendations for improving the way certain criteria are defined were already submitted to the EU Commission in December. They were also forwarded to bodies and individuals responsible for such issues. A further recommendation is that established certification systems should be recognised as a means of providing evidence in order to leverage synergies and avoid unnecessary additional resource investments.
It certainly makes sense to set up data repositories
It has also become apparent that in many cases, market stakeholders are simply not yet prepared for the EU taxonomy. On the one hand, some buildings do not meet required quality standards. But also, the spotlight is now turning on providing information. "They need to take a really close look at the requirements and work out how to integrate this entire issue into processes in a sensible way – such that it minimises effort," states Lemaitre. "Our recommendation is that companies set up centralised data repositories, which should become standard practice." This will be a particularly important step when it comes to scaling up to entire portfolios.
Potential of the taxonomy to fuel transformation not yet exploited
Ultimately, the study shows that the taxonomy criteria as they stand at the moment can only be fully met by projects that already meet exceptionally high sustainability standards. Although it is right to define ambitious requirements, especially given the urgency of issues such as climate protection and climate adaptation, they are too ambitious. The EU Commission is squandering a golden opportunity to exploit the full potential of the taxonomy to foster transformation in the real estate industry. "If people get the impression they can't meet the requirements anyway, there'll be totally unmotivated to even try in the first place," states Lemaitre. "If a way can be found to get a broader spectrum of projects to come on board, we'd have a lot more potential to use this opportunity to set sweeping changes in motion."
Feedback from participants in the study
Carl Backstrand, ACE, Denmark:
"The study once again underlines – with real case projects – something that we have expected for a long time: the building and construction industry has a problem and the need to improve data collection and to ensure a higher data reliability!"
Dr Richard Teichmann, Managing Director of Teichmann & Compagnons Property Networks GmbH, Austria:
"The finance industry had not taken much initiative so far. The EU taxonomy could be a game changer for the market – to gain insights in application we took part in this study!"
Carlos Valdés, independent ESG consultant, Spain:
"The recommendations included in this report will be beneficial, not only for the European authorities, but also for many players across different industries relevant to the building value chain, such as business associations, real estate developers, constructors and manufacturing companies, training centres and technical faculties. All of them will play an important role in raising awareness of the importance of the EU Taxonomy criteria for the building industry."
Konrad Hedemann, ESG Associate at Allianz Real Estate GmbH, Germany:
"Participating in the study was important for us to be able to assess the information base on our real estate assets against the Taxonomy. The study highlighted the possible blind spots and where we can better prepare for the future."
Alexander Piur, Head of Sustainability and Innovation at ING Wholesale Banking Real Estate Finance, Germany:
"Real Estate lenders are one of the key accelerators of the transformation towards a Net-Zero-Carbon Real Estate industry. But when it comes to data, banks are at the receiving end in that process. To be able to steer the lending activities into the right 'sustainable' direction and to avoid 'green washing' - aligned, accepted and communicated benchmarks amongst all players in the value chain are key. The EU Taxonomy is the next level of standardization and transparency and will also trigger the development of new sustainability linked finance products. However, the framework is quite complex and data intense, which leads to one of my major concerns: Acceptance of the Taxonomy in the Real Estate sector. By participating in the study, my major takeaways to make the EU Taxonomy a success are: clear definitions and benchmarks, easy accessibility of data and finally - the right support and trainings as exemplified by the collaborative work of the study group.