What is EU Taxonomy and how does it apply to the construction industry?
One of the key elements of Regulation (EU) 2020/852 (Taxonomy Regulation) is the introduction of a classification system to determine what is considered an "environmentally sustainable economic activity", known more broadly as EU taxonomy. We anticipate developers and investors will closely align themselves with the EU taxonomy framework as part of their green transition. Such alignment will assist with achieving the EU’s climate and environmental goals to cut greenhouse gas emissions by at least 55% by 2030 and achieving CO2 net zero by 2050.
The construction industry has a significant role to play in decarbonising the construction and real estate sectors to achieve net zero by 2050, with the construction and real estate sectors responsible for 40% of Europe’s total energy consumption , and 40% of CO2 emissions globally . The construction industry is not only considered the largest consumer of raw materials globally, but also the largest consumer of high emission raw materials including concrete and steel.
Alignment with EU taxonomy will ensure development and investment are directed towards sustainable projects and activities. In the construction industry, examples of economic activities that may be assessed for alignment with EU taxonomy (that is, whether or not the economic activity is economically sustainable) include a developer developing an office block or apartments, a purchaser purchasing such asset, or an investor lending into a construction project.
EU taxonomy alignment is not mandatory for developers and investors; however, these parties may be subject to the reporting obligations set out in the Taxonomy Regulation. These include, for non-financial entities, such as developers, a requirement to disclose the proportion of their turnover derived from products or services which are Taxonomy aligned. With certain investors also required to disclose the percentage of their investments that are Taxonomy aligned.
Climate change mitigation
Climate change adaptation
Sustainable use and protection of water and marine resources
Transition to a circular economy
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems
Six environmental objectives are identified in the Taxonomy Regulation. The environmental objectives are a key part of the determination of whether an economic activity is environmentally sustainable, these are:
the Taxonomy Regulation sets out four overarching conditions that an economic activity must meet in order to qualify as environmentally sustainable, essentially a four-step analysis is needed to determine whether the economic activity
contributes substantially to at least one environmental objective
does not significantly harm any of the environmental objectives
is carried out in compliance with minimum safeguards
complies with the technical screening criteria set out in the taxonomy delegated acts
We are seeing certain trends emerging as a result of the construction industry's increasing alignment with Taxonomy Regulation, including:
Project specifications: developers and investors are considering EU taxonomy when preparing the specifications for the development, this may include incorporating modern methods of construction, the use of recycled materials, the recycling of materials from the site, the renovation or re-fit of a space rather than the full demolition.
EU taxonomy consultants: developers and investors are appointing specialist EU taxonomy consultants to assist the developers and investors align a development with the environmental objectives.
Obligations on contractors and design team: EU taxonomy obligations are being passed down by developers and investors through the building contract and design team appointments. Such obligations include a requirement to ensure a development complies with various criteria in respect of the overarching conditions, which may be appended to a contract. For example, the Taxonomy Regulations provide the following criteria, in respect of the "climate change mitigation" environmental objective, and the "substantial contribution" overarching condition:
The primary energy demand (PED), defining the energy performance of the building resulting from the construction, is at least 10% lower than the threshold set for the nearly zero-energy building (NZEB) requirements in national measures implementing Directive 2010/31/EU of the European Parliament and of the Council. The energy performance is certified using an as built energy performance certificate (EPC).
For buildings larger than 5000 m2, upon completion, the building resulting from the construction undergoes testing for airtightness and thermal integrity, and any deviation in the levels of performance set at the design stage or defects in the building envelope are disclosed to investors and clients. As an alternative, where robust and traceable quality control processes are in place during the construction process this is acceptable as an alternative to thermal integrity testing.
For buildings larger than 5000 m2, the life-cycle global warming potential (GWP) of the building resulting from the construction has been calculated for each stage in the life cycle and is disclosed to investors and clients on demand.
An employer may require a contractor to confirm whether these criteria are achieved prior to practical completion being achieved.
The World Green Building Council (WGBC) and the European Public Real Estate Association (EPRA) collaboration
The WGBC and the EPRA have launched an important new collaboration designed to aid EU member states in aligning and concentrating their efforts in achieving EU taxonomy compliance, and ultimately decarbonise the construction and real estate sectors in line with EU taxonomy requirements.
A key focus of this collaboration is to help key stakeholders in the construction industry navigate the complicated interface between advising on the objective legal standards set out in the EU taxonomy and the technical exercise of designing and constructing in line with those parameters in order to ensure their project is classified as environmentally sustainable (both in terms of construction and design methodology).
The collaboration proposes to highlight issues of concern by providing practical technical guidance such as assistance in the calculation of nearly zero energy building, explaining energy performance certificate or EPC methodologies and defining what constitutes a major renovation for the purposes of the EU taxonomy.
We anticipate that alignment with EU taxonomy will have a significant impact on how the construction industry operates. There will be a drive towards sustainable developments to ensure that such developers and investors align with EU taxonomy, and that developments will continue to be attractive to investors in the future. The industry will be forced to adapt, and implement new technologies to reduce emissions, use recycled materials, reduce use of high emission materials such as concrete and steel, re-fit and renovate buildings rather than demolish. It will be interesting to see how such considerations evolve and manifest in development agreements and other construction contracts in respect of EU Taxonomy compliance on projects in Ireland.