Taxonomy Check for Real Estate

The EU Taxonomy is a key component of the EU action plan for sustainable finance. The aim of the action plan is to redirect financial flows towards more sustainable activities in order to be able to finance the transition towards a more sustainable economy. As a uniform classification system, the taxonomy is meant to clearly define which economic activities can be declared as sustainable and which requirements must be met. The goal is to create a common framework and to prevent greenwashing.

As of January 1, 2022, the EU Taxonomy Regulation must be applied to all companies in EU member states that are subject to non-financial reporting in accordance with the CSR Directive Implementation Act. This primarily affects financial institutions, capital market-oriented companies with 500 or more employees, and banks and insurance companies. Starting January 1, 2024, this will also apply to all companies that fall under the extended reporting obligation in accordance with the CSR Directive. These include for example larger non-capital market-oriented companies and medium-sized, publicly listed companies.

According to the Taxonomy Regulation, an economic activity is considered to be taxonomy-compliant if it makes a significant contribution to at least one of six environmental objectives without harming or counteracting the other environmental objectives (Do No Significant Harm – DNSH). At the same time, certain minimum requirements must be met, e.g. with regard to social issues and human rights. The environmental taxonomy objectives are: (1) climate protection, (2) adaptation to climate change, (3) sustainable use of water resources, (4) transition to a circular economy, (5) pollution prevention, and (6) protection of ecosystems and biodiversity.

As of January 1, 2022, affected companies must disclose the share of taxonomy-eligible and non-taxonomy-eligible economic activities in their total sales, and in their capital expenditures (capex) and operating expenditures (opex) in the non-financial statement in the company report or in a separate report (e.g. in a DNK [German sustainability code] statement). Furthermore, the qualitative information relevant to this disclosure as specified in the Annexes of the delegated act must be supplied, and, starting January 1, 2023, supporting information must be described and verification provided. For financial institutions, additional reporting requirements apply, including information on risk positions and on more detailed performance indicators.

The real estate industry is affected by the taxonomy across its entire value chain. From the investment company to asset, property and facility management – data must be collected, analyzed and evaluated in accordance with the Taxonomy Regulation requirements and the delegated acts. These data must then be processed and compiled into a reporting format. This creates many separate questions, such as the assessment of whether properties can really be classified as sustainable in accordance with the taxonomy requirements or whether they can be upgraded in this direction in order to avoid so-called stranded assets. It is advisable to find competent partners to assist in clarifying these issues.

The delegated act of the Taxonomy Regulation suggests to have an independent third party verify compliance with the specified technical assessment criteria. As an independent body, TÜV Rheinland can conduct the proper compliance audits and assessments.

The taxonomy as a classification system of sustainable economic activities is intended to direct EU money flows into sustainable investments. This is assessed using so-called sustainability indicators or Environmental Social Governance (ESG) indicators. Corporate Social Responsibility (CSR) is one of the components of the social indicators.

With the taxonomy check, TÜV Rheinland supports real estate clients with verifying the taxonomy compliance of their assets. TÜV Rheinland provides consultations on the required data and documents, checks data quality and informative value, and evaluates compliance with the taxonomy requirements. Initial suggestions for areas for improvement are also provided.

DNSH is an acronym for “Do No Significant Harm”. It means that economic activities must not harm or counteract any of the specified environmental objectives in the context of the taxonomy assessment.

The economic activities refer to specific economic business activities that have been mapped to relevant industries. An overview of which economic activities fall under the Taxonomy Regulation can be found in the EU Taxonomy Compass: https://ec.europa.eu/sustainable-finance-taxonomy/

A wide range of information is needed to assess taxonomy compliance. The most important are records and supporting documents pertaining to the sustainability strategy of the company and the property or fund, general key data of the property, documents with information on energy demand and energy consumption and, if applicable, already existing risk assessments regarding the climate adaptability of the property.

The EU´s efforts are moving in that direction. It is expected that in the coming years, taxonomy requirements will also be issued for the “Social” and “Governance” sustainability pillars. In July 2021, the Platform on Sustainable Finance already published a first draft for a “social taxonomy”.