In the European Union's classification system for sustainable financing - the taxonomy - the business financing of companies is harnessed for the first time to speed up the implementation of emission reduction goals. The ambitious goal is to create a mechanism by which the availability of money or the price of money is tied to how climate-friendly the investment target is.
The Taxonomy Regulation entered into force in July 2020. The delegated regulations supplementing it are now in full force. The EU taxonomy is a legal classification system that lists environmentally sustainable economic activities. At the same time, it is a revolutionizing change in the entire European financial system, in which the financing of companies and the implementation of climate goals are linked together.
The real estate and construction sector is listed, along with energy production, transport and the production of primary raw materials (especially steel and cement), as a significant industry within the scope of the taxonomy from the point of view of greenhouse gas emissions. In the criteria for compliance with the taxonomy of the Kira sector, energy efficiency and low carbon are especially emphasized. In addition, the circular economy is in a significant position from the point of view of reducing the amount of waste, utilizing recycled materials and extending the life cycle. Criteria for biodiversity are presented as a new requirement to consider.
In the future, companies will be required to produce a kind of environmental accounting alongside the financial statements, which will allow them to report on the effects of their operations on climate and biodiversity, among other things. In the future, the project's financeability will therefore not only depend on financial indicators, but investors' attention should also be paid more to sustainability-related risks.
Based on impact reporting, financiers and investors can compare the environmental impacts and responsibility of different investment sites supporting the green transition. Here, the corporate sustainability reporting directive, CSRD, is essentially linked to the delegated regulations of the EU taxonomy, where technical criteria are used to determine reporting key figures.
Environmental goals and criteria as a basis for sustainability assessments
The taxonomy assesses the environmental effects of economic activity from the perspective of six different environmental goals. These are
- mitigation of climate change,
- adaptation to climate change,
- sustainable use and protection of water resources and the natural resources offered by the seas,
- transition to a circular economy,
- preventing and reducing environmental pollution and
- protection and restoration of natural diversity and ecosystems.
In order for economic activity to be sustainable, it must contribute significantly to at least one environmental goal. In addition, the activity in question must not hinder any other of the aforementioned environmental goals. The principle of avoiding significant harm is described by the term "Do-No-Significant-Harm" (DNSH).
The delegated regulations implementing the taxonomy contain precise criteria for evaluating the promotion of the aforementioned environmental goals. Their application will be implemented in two stages. The application of the first delegated regulation, the technical assessment criteria for mitigating and adapting to climate change, began at the beginning of 2022 with the assessment of taxonomy eligibility, i.e. how much of the business falls within the scope of the taxonomy, for example new construction.
From the beginning of 2023, compliance with the taxonomy has been assessed, i.e. how the requirements of the criteria can be met. The second delegated regulation on the environment on the technical criteria for the other four environmental goals was published in November 2023, and its application will start from the beginning of 2024 in two stages, like the first delegated regulation.
In addition to environmental goals and related criteria, the taxonomy includes a so-called minimum protection review in terms of social responsibility. It means that sustainable operations must not, for example, be against human rights. The minimum requirements come especially from the OECD's guidelines for multinational companies, the UN's guiding principles on business and human rights, the eight central conventions of the International Labor Organization's declaration on basic principles and rights in working life, and the international human rights document.
The criteria still have a lot to improve
According to the view of the construction industry, the criteria given in the delegated regulations of the EU taxonomy do not yet fully meet the needs of the market and industry. They should be further revised and updated to ensure that the rating system can eventually work in practice. In particular, the introduction of criteria useful in the circular economy could speed up the creation of a market for recycled materials and old reusable building components.
The classification criteria should be based on facts and figures from practical business. They should be simple, measurable and connected to the actual operations of companies to ensure usability. In addition, the criteria should be limited to what is essential for significant effectiveness and improvements. These key elements are essentially missing from the criteria proposals related to the construction industry.
In order for the classification system to be successfully implemented, it needs support from the real economy, i.e. from those who implement the criteria and reporting obligations. Despite the shortcomings of the published criteria, the real estate and construction sector is committed to developing usable criteria to support the green transition of the sector. Among other things, Rakennusteollisuus RT has carried out studies on the national interpretation of partially difficult criteria.
Companies in the construction industry are already piloting the criteria of the climate package in order to detect technical problems and collect information for the necessary criteria update in the future. The EU Commission itself has identified the need for updates and has opened a feedback channel for stakeholders, which is currently waiting for technically justified criteria improvement proposals.
At its best, the EU taxonomy can act as an accelerator of the green transition of the kira sector and equalize the market when harmonizing criteria specific to financiers. It is overtaking the slowly developing EU-level and national regulation promoting sustainability and the green transition. For example, the kira sector can already meet the strict requirements of improving energy efficiency with different solutions.
The situation is different for the circular economy. The regulation supporting it should be developed urgently while removing the obstacles to its promotion. Other member states have also woken up to this, so we cannot afford to fall behind this development. The public sector is also urgently needed to create demand for creating a market for circular economy solutions.
EU taxonomy
Classification system, which defines environmentally sustainable economic activity, i.e. so-called green investment targets.
Construction industry is practically completely taxonomical.
In taxonomy reporting (related to corporate sustainability reporting, CSRD) tells about the consistency of the company's business operations and investments with the six environmental goals of the taxonomy:
1. delegated regulation (already in force and to be reported)
Mitigation of climate change / Adaptation to climate change
2nd delegated regulation in preparation (estimated to enter into force at the beginning of 2024)
3. Sustainable use and protection of water resources and marine natural resources
4. Transition to a circular economy
5. Preventing and reducing environmental pollution
6. Protection and restoration of biological diversity and ecosystems
Taxonomy harnesses the business muscle of companies - financing - to speed up the implementation of emission reduction targets. The Kira sector has great potential here (real estate, house construction, infrastructure construction).
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