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EU Taxonomy and real estate business

EU law requires large companies to disclose certain information on the way they operate and manage social and environmental challenges. This helps investors, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business.

Real Estate and Construction

Since 2018, a lot has happened in EU law in the field of sustainability in finance sector. The so called non-financial reporting directive (NFRD Directive) requires certain large companies to publish non-financial and ESG information in their reporting from 2018 onwards. Disclosure Regulation (EU) 2019/2088, on the other hand, requires that this data is published, for example, on the company's website and in periodic reports. Investment firms analyze the data and taxonomy based on the regulation to classify the sustainability of investing in a company.

An EU classification system for sustainable activities, i.e. an EU taxonomy entered into force on 12 July 2020 with some exceptions. The EU Taxonomy is a regulation-based tool to help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy.

The Taxonomy includes so called technical screening criteria for economic activities which make substantive contribution to specified environmental objectives and at the same time do no significant harm to the other environmental objectives, and which meet certain minimum safeguards.

Taxonomy regulation is directly binding legislation for companies operating in the financial markets that offer their products in the EU.  This includes large companies with more than 500 employees, and which are publicly significant companies such as listed companies, credit institutions, insurance companies and other companies identified as locally significant (so-called PIEs). 

The first environmental standards within the Taxonomy concerning climate impacts will be published later in this year. The European Commission will adopt a delegated act by June 2021 specifying the information to be disclosed, and the first reporting will take place in 2022 in connection with the release of financial data for 2021. 

Taxonomy regulation indirectly affects those operators who seek financing for their investments from the market. Thus, in the future, investors may require their beneficiaries to report on matters in accordance with the Taxonomy regulations. Investor reporting is based on the following themes: climate change and measures to reduce emissions, climate change and adaption, sustainable protection of the seas and water, the circular economy, prevention and management of emissions, and conservation of biodiversity. In practice, the purpose of Taxonomy regulation is to guide financiers to sustainable financing. 

Taxonomy regulation might over time mean more extensive need for real estate industry operators to report and keep available the above-mentioned information if they want to assure financing for themselves. It is possible that the taxonomy regulation will affect the pricing and even the access to financing. In our view the Taxonomy regulation compliance is emphasized especially in so called Green EU-bonded financing.

Even if for example real estate operators directly do not have to report their operations in accordance with the Taxonomy, they may still need to report their energy and eco-efficiency activities in a similar way, so that investors can in turn report their own investments. Similarly, a real estate operator may find motivation for similar reporting regarding possible changes in ownership.

"When the disclosure regulation requires companies to disclose information even when the ESG criteria have not been met in their business, this is likely to lead to companies complying with the criteria simply for image reasons," says Satu Pohja, Senior Legal Counsel at Fondia Finland.

In practice it may be demonstrated and ensured by contractual means that the targets under the Taxonomy are actually met by the company. This requires an overarching point of view: from environmental certificates of buildings to waste management systems, reducing car traffic, using recycled materials in construction and energy saving machines and processes in business.

In addition, and not to forget, investors and other actors need to be observant to green-washing strategies misleading the market and financiers with advertisement falsely picturing a company as more environmentally friendly that it is in the reality.” says Linda Graf, Senior Legal Counsel specialized in Real Estate and Construction law at Fondia Sweden.