Green taxonomy trends facing the real estate sector

The European Union (EU) has taken the first step in directing capital investments toward so-called sustainable activities with the introduction of the Green Taxonomy on 1 January 2022. For the real estate sector, the objective is to measure the share of eligible activities contributing to the first two climate objectives – the mitigation of climate change and adaptation to climate change.

An analysis* of the first publications of the three eligibility ratios by the EU’s ten leading real estate players subject to this new regulation shows a level of consistency that hides some disparities. Regarding findings and best practices, FABEGE publishes the percentage of buildings whose energy performance is among the “15% of the national building stock with the best performance” (72% below 89 kWh/m2). The impact of alignment criteria on the evolution of ratios from the next financial year is given as a warning by 10% of issues, and Covivio publishes a correspondence table between the six environmental objectives and the actions implemented by the group to contribute to them. No issuer has voluntarily published alignment ratios.

Disparities in interpretation

Regarding the methodology used, the lack of precision in the texts generates disparities in interpretation that can significantly impact the final ratios in the real estate sector. For example, in addition to rental income, re-invoiced rental charges and real estate development income, some issuers have included income from property management and administration services in the numerator of the turnover ratio. 

In terms of capital expenditure, some issuers only considered investment properties according to IAS 40, while others include other tangible fixed assets such as fittings and furniture, also intangible fixed assets. Most issuers considered all upkeep, maintenance and repair costs as eligible under operating expenses without excluding cleaning costs, vertical transport, or safety and security. However, although the level of transparency is heterogeneous, all the manufacturers detail the methods for calculating the three ratios.

Emerging trends to consider

While the clarifications provided by the EU have contributed mainly to facilitating 2021 ratios and aligning market practices, several emerging trends signal challenges ahead for the 2022 financial year. 

In terms of demonstrating compliance with the technical review criteria for buildings in operation, the real estate sector needs to consider what energy performance thresholds should be applied according to the type of building and their geographical location. In the context of the construction of new buildings, there is the need to ensure compliance with the Do No Significant Harm (DNSH) standards. In particular, concerning the objectives of the circular economy and how and at what level to collect necessary information. Depending on whether or not a building meets the technical review criteria, a focus on what types of work are aligned and how to assess the physical climate risks will also need to be considered.

Based on the analysis, no issuer has chosen to use the tables proposed in the delegated acts. However, as these are mandatory from 2023, it will force issuers to publish alignment ratios by activity. On a positive note, 30% of issuers have integrated this new regulation into their risk mapping at the Group level regarding the financial impact that could result from it.

*For more information, please refer to Les cahiers sectoriels de la taxinomie : secteur Immobilier  (available in French).