The EU Taxonomy – Why Is It Relevant For Norwegian Real Estate Players? – Environment

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:

1. 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;




2. do no significant harm to any of the other environmental
   objectives;




3. 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




4. 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:

1. 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).




2. The building must withstand extreme rainfall, floods and
   increased temperatures.




3. The building must have water-saving installations.




4. 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.




5. Building components and materials used in the construction must
   not contain asbestos or other specified environmental toxins.




6. The building cannot be built on contaminated ground.




7. Construction equipment that complies with the Non-Road Mobile
   Machinery Directive must be used for construction.




8. The building cannot be built in nature conservation areas.




9. The building cannot be built in areas with a high agricultural
   value.




10. 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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.