The EU has adopted a classification system that determines which economic activities may be considered sustainable. The classification system, referred to as the ‘EU taxonomy', also includes the real estate industry, and will have significant impact on whether a new construction project, rehabilitation or acquisition of property is to be regarded as a ‘green'.
In this article, we take a closer look at why and how the taxonomy is relevant for Norwegian real estate players, including how it may impact new construction projects and whether the requirements to a new building under the EU taxonomy is stricter than the rules we already have in this sector in Norway.
What is the EU taxonomy?
The European Commission has prepared an action plan for financing sustainable development for the purpose of increasing capital flows to the green shift. The EU's taxonomy is the main pillar of this action plan. The taxonomy establishes a unified classification system that defines which economic activities can be considered environmentally sustainable. The idea is that the clarifications in the taxonomy will increase transparency (no “shades of green”), thereby enabling informed decision-making to scale up sustainable investments.
The Regulation (EU) 2020/852 (the “Taxonomy Regulation”) was published on 22 June 2020 and entered into force on 12 July 2020. It sets out four overarching conditions that an economic activity must meet in order to qualify as environmentally sustainable. An activity must:
- make a substantial contribution to the fulfilment of at least one of the EU's six environmental objectives; i) climate change mitigation; ii) climate change adaptation; iii) sustainable use and protection of water and marine resources; iv) transition to a circular economy; v) pollution prevention and control vi) protection and restoration of biodiversity and ecosystems;
- do no significant harm to any of the other environmental objectives;
- be carried out in compliance with minimum social safeguards as outlined in the OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights; and
- comply with technical screening criteria.
The European Commission has prepared technical screening criteria for the first two environmental goals (i.e. climate change mitigation and climate change adaptation). The reporting and disclosure obligations related to these screening criteria will apply in the EU from 1 January 2022, whereas the screening criteria covering the remaining four environmental objectives will apply from 1 January 2023.
The Norwegian Financial Supervisory Authority has proposed a new act on sustainability related disclosure that incorporates the EU taxonomy into Norwegian law. The deadline for the hearing of the bill was 8 January 2021.
Financial market participants and large public interest entities (that are required to publish non-financial information under the Non-Financial Reporting Directive (“NFRD”)) are directly regulated by the taxonomy. For these actors, the taxonomy will entail a duty to report on their investments'/activities' alignment with the taxonomy. However, the taxonomy will also have indirect effect on a much larger group of actors. For example, financial market participants will need information from all the companies in which they are invested (both large and small) to be able to fulfil their reporting obligations. Therefore, many small or medium-sized companies will be called upon either to provide data to investors, or to provide data to customers (NFRD companies) with reporting obligations under the Taxonomy Regulation.
How is the taxonomy relevant for real estate players?
Considering an ever-increasing focus on sustainability and social responsibility among property owners, investors, banks and tenants, the taxonomy will have a major impact on the flow of capital within the real estate market.
Buildings account for 40% of the energy consumption within the EU. A key goal for the Taxonomy Regulation is to turn investments towards more energy-efficient buildings and stimulate investment in buildings that help reduce energy consumption. The following building-related activities are currently covered by the taxonomy:
- Acquisition of property
- Construction of new buildings
- Rehabilitation of existing buildings
- Environmental measures in existing buildings
With respect to construction of new buildings, the current technical screening criteria includes the following cumulative conditions:
- The building must have an energy requirement that is at least 20% lower than the threshold set for the nearly zero-energy building (NZEB). NZEB is not yet defined in Norway but will be linked to energy efficiency and production of renewable energy. The energy performance is certified using an as built Energy Performance Certificate (EPC).
- The building must withstand extreme rainfall, floods and increased temperatures.
- The building must have water-saving installations.
- At least 70% (by weight) of the non-hazardous construction and demolition waste generated on the construction site must be prepared for re-use, recycling and other material recovery.
- Building components and materials used in the construction must not contain asbestos or other specified environmental toxins.
- The building cannot be built on contaminated ground.
- Construction equipment that complies with the Non-Road Mobile Machinery Directive must be used for construction.
- The building cannot be built in nature conservation areas.
- The building cannot be built in areas with a high agricultural value.
- At least 80% of embedded wood materials must be recycled or FSC / PEFC certified.
Will a BREEAM-NOR certified new building achieve the taxonomy screening criteria?
Launched in 1990, BREEAM is Europe's leading environmental certification method for buildings. BREEAM-NOR is the Norwegian version of the certification system. Certificates are issued in five levels from Pass to Outstanding.
When a new building is BREEAM-certified, up to ten criteria are assessed; management, water, health and indoor environment, materials, energy, waste, transport, land use and ecology, innovation and pollution. The total score determines what level of certification the building achieves.
All the above mentioned proposed criteria for new buildings under the taxonomy will give points under the BREEAM-NOR. Thus, a new building constructed in accordance with the taxonomy will most likely also become BREEAM-NOR certified. However, a BREEAM-NOR certified building will not automatically meet the criteria in the taxonomy. In the version of BREEAM-NOR that will be launched in 2021, the taxonomy screening criteria will therefore be incorporated. This will make it easier to construct a building that complies with both the taxonomy and BREEAM-NOR.
What about the existing national requirements on energy consumption and technical requirements for construction works?
Norwegian law already contains requirements regarding energy consumption in buildings. From 1 July 2010, non-residential buildings for sale or rent, among others, must have an energy label. The energy label consists of an energy rating from A to G, based on energy consumption. Further, it consists of a heating rating from green to red, based on an installed heating system. Since NZEB is not yet defined in Norway, it is so far not known whether the taxonomy will set out stricter requirements regarding energy consumption than the existing legislation in Norway.
The Norwegian regulation on technical requirements for construction works (No: Byggteknisk forskrift) (TEK17) has many requirements for new buildings that are similar to the technical screening criteria under the taxonomy. Such as handling of surface water, pollution, where a new building can be built, waste management, substances that are harmful to health and the environment, etc.
Based on the abovementioned list of conditions to construction of new buildings, it appears that the taxonomy will introduce some stricter requirements and some new requirements compared with those that follow from the current Norwegian energy labelling system and TEK17. However, whether this is correct remains to be seen, since the taxonomy screening criteria still are being developed.
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