European Commission
A classification system defining environmentally sustainable economic activities for promoting finance and transparency.
The EU Taxonomy Policy Framework and Its Relevance to the Built Environment in Europe
Introduction
The EU Taxonomy is a cornerstone of the European Union's sustainable finance framework and a pivotal market transparency tool. Established through Regulation (EU) 2020/852, which entered into force in July 2020, the taxonomy provides a classification system that defines which economic activities can be considered environmentally sustainable. As buildings account for approximately 36% of greenhouse gas emissions in Europe, the built environment sector plays a crucial role in the EU's transition to a low-carbon economy, making the taxonomy particularly relevant for real estate developers, investors, and property owners.
The EU Taxonomy Framework
Core Structure and Objectives
The EU Taxonomy is structured around six environmental objectives:
- 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
For an economic activity to be considered environmentally sustainable under the taxonomy, it must:
- Make a substantial contribution to at least one of these environmental objectives
- Do No Significant Harm (DNSH) to any other environmental objective
- Comply with minimum social and governance safeguards
- Meet specific Technical Screening Criteria (TSC)
Technical Screening Criteria
The Technical Screening Criteria (TSC) are the key guiding principles for assessing the environmental impact of economic activities. These criteria define thresholds and requirements that economic activities must meet to be considered taxonomy-aligned. The criteria are developed for activities under all six environmental objectives and range from production-specific requirements to site-specific requirements.
The European Commission has progressively released these technical screening criteria through delegated acts. The first set, focusing on climate change mitigation and adaptation, was adopted in April 2021. In June 2023, additional delegated acts were published for the four remaining environmental objectives.
Implementation Timeline
The implementation of the EU Taxonomy is phased:
- Since January 2022, large public-interest companies already subject to the Non-Financial Reporting Directive (NFRD) have been required to disclose their taxonomy eligibility
- From 2022 onwards, these companies must report on taxonomy alignment
- With the introduction of the Corporate Sustainability Reporting Directive (CSRD), which gradually replaces the NFRD, more companies will be required to report on the EU Taxonomy in the coming years
The EU Taxonomy and the Built Environment
Covered Activities in Construction and Real Estate
The taxonomy encompasses various activities in the construction and real estate sectors:
- Construction of new buildings
- Renovation of existing buildings
- Acquisition and ownership of buildings
- Demolition/deconstruction of buildings
- Installation of energy-saving equipment and professional services
Key Criteria for Buildings
For New Constructions
- Energy performance must be at least 10% below the Nearly Zero-Energy Building (NZEB) standard
- Environmental Impact Assessment must be conducted to identify and mitigate potential environmental risks
- Buildings should not be located on arable land, forests, or land of high biodiversity value
- At least 70% of non-hazardous construction waste must be prepared for reuse or recycling
For Renovations
- Must achieve at least a 30% reduction in primary energy demand
For Existing Buildings
- Buildings with an Energy Performance Certificate (EPC) rating of A or B qualify for the top 15% of the most energy-efficient buildings
- In some cases, buildings with no valid EPC but built after 2009 may also qualify for the top 15%, depending on national standards
Life Cycle Considerations
The taxonomy increasingly emphasizes whole-life carbon assessment for buildings. In June 2023, new criteria for circular economy were introduced, requiring disclosure of a building's life-cycle Global Warming Potential (GWP). This reflects growing recognition that embodied carbon (emissions from materials and construction processes) is as important as operational carbon for modern, energy-efficient buildings.
Current Relevance to the Built Environment Sector
Market Impact
The real estate sector shows the highest share of EU Taxonomy eligibility compared to other sectors, with an average turnover eligibility of 87%. However, it also demonstrates the largest gap between eligibility and alignment (68%), indicating significant challenges in fully meeting all criteria.
Investment and Financing
The taxonomy is increasingly influencing investment decisions in the real estate sector:
- Banks have started reporting on their Green Asset Ratio (GAR) in 2024, with the Bank Book Taxonomy Alignment Ratio (BTAR) to follow
- Real estate forms a significant portion of bank balance sheets, making taxonomy alignment important for future financing decisions
- Properties that meet taxonomy criteria may enjoy preferential financing terms and broader investment appeal
Strategic Implications for Stakeholders
For Developers and Owners
- Opportunity to integrate sustainability into strategic planning
- Potential competitive advantage through higher taxonomy alignment scores
- Better access to green financing and investment
For Architects and Planners
- Growing influence in ensuring taxonomy compliance during early design phases
- Responsibility to preserve sustainability information throughout the project lifecycle
- Opportunity to demonstrate added value to clients through taxonomy expertise
For Investors
- Common language and clear framework to assess the sustainability of real estate investments
- Protection against greenwashing
- Tool to align investments with climate and environmental goals
Challenges and Future Developments
Despite its comprehensive approach, the EU Taxonomy faces several challenges in the built environment sector:
- Current focus on operational carbon emissions, with evolving consideration of embodied carbon
- Data availability and complexity in reporting
- Gap between eligibility and alignment in the real estate sector
- Need for greater integration with other sustainability frameworks and regulations
As the taxonomy develops, it is likely to become even more central to decision-making in the built environment, driving the sector toward greater sustainability and alignment with the EU's climate neutrality goals.
References
- European Commission. "EU taxonomy for sustainable activities."
- Bruegel. "How to improve the European Union's sustainable finance framework."
- European Commission. "Implementing and delegated acts - Taxonomy Regulation."
- Greenly. "What is the EU Taxonomy?"
- Wikipedia. "EU taxonomy for sustainable activities."
- European Commission, Joint Research Centre. "EU Taxonomy - EU Science Hub."
- FfE. "Info: What is the EU Taxonomy for Sustainable Activities?"
- EASA. "EU Taxonomy for Sustainable Activities."
https://www.bruegel.org/policy-brief/how-improve-european-unions-sustainable-finance-framework
https://greenly.earth/en-gb/blog/company-guide/what-is-the-eu-taxonomy
https://en.wikipedia.org/wiki/EU_taxonomy_for_sustainable_activities
https://www.ffe.de/en/publications/info-what-is-the-eu-taxonomy-for-sustainable-activities/