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Natural Environment

How are EU sustainable finance policies impacting the built environment sectors?

Our most recent European WBEF webinar took place on the eve of the EU's "FitFor55" launch. The initiative targets a 55% reduction in carbon emissions by 2030, and forms just one part of a much larger suite of continent-wide sustainability legislation. But questions remain as to whether these legal frameworks adequately support the bloc's decarbonisation ambitions.

Sander Scheurwater, Head of Public Affairs – AEMEA, RICS
20 July 2021

The European Union has repeatedly stressed its aim to create, through enabling policy frameworks, the world’s first carbon neutral continent. This ambition first took shape in 2019, with the announcement of the Green Deal. Since then, much existing legislation has been climate-proofed, and a series of new laws introduced, all for the purpose of equipping the bloc for this monumental challenge.

Legislators have certainly been busy in recent weeks. On 6 July, the EU Commission published its Sustainable Finance Strategy. The strategy brings together a classification framework – the EU taxonomy on sustainable finance – and a system of disclosures, including the Sustainable Finance Disclosure Regulation and Corporate Sustainability Reporting Directive. These are complemented by an array of toolkits including the EU Climate Benchmark Regulation and a Standard for European Green Bonds.

How are EU sustainable finance policies impacting the construction and real estate sector?

In this webinar, in partnership with Glodon, we will explore the impact of the Taxonomy Regulation and Sustainable Finance Disclosure Regulation (SFDR)

Download the webinar presentation

Then, barely a week later, the FitFor55 package was launched. The initiative targets a 55% reduction on 1990-level carbon emissions by 2030. Understandably, the plans contain much food-for-thought for professionals in the built and natural environment. Highlights include:

  • A separate and new emissions trading system for buildings;
  • “Efforts sharing regulation”, assigning strengthened emissions reduction targets to each Member State for buildings and other emissions sources;
  • A new EU target for carbon removals in relation to Regulation on Land Use, Forestry and Agriculture;
  • More ambitious and binding annual targets within the Energy Efficiency Directive, including a requirement for the public sector to renovate 3% of its buildings each year.

Sean Kidney, CEO of the Climate Bonds Initiative, commends the EU for resisting the tendency to procrastinate and taking immediate action. He does warn, though, that while the commitments represent a significant step forward, more action is needed. It is an alarming fact that global demand for air conditioning has outstripped renewable energy growth over recent years. According to some sources, electricity demand for cooling and heating units is expected to rise by up to 140% by the middle of this century. The urban heat island effect is creating a deficit in renewable energy provision versus new and emerging energy needs. European policymakers are, so far, behind the curve when it comes to legislating for this reality.

Electricity demand for building cooling and heating units is expected to rise by up to 140% by the middle of this century. The urban heat island effect is creating a deficit in renewable energy provision versus new and emerging energy needs.

According to the EU taxonomy, an investment can be classified as green or sustainable, if it relates to:

  • An existing building that is in the top 15% of local buildings for energy efficiency (a goalpost that will shift closer to zero carbon every three years);
  • A retrofit project leading to a 30% energy efficiency improvement across affected buildings;
  • A new building performing 10% better than a yet-to-be-established baseline (this will be clarified in a forthcoming European building standard).

Embodied carbon, notes Kidney, is not covered by any of the above.

The Climate Bonds Initiative is working closely with the European Mortgage Federation on the Energy Efficient Mortgages Initiative. The aim is to improve banks’ understanding of the taxonomy rules, and ease their eventual implementation.

Jennifer Johnson, Deputy Secretary-General of the European Mortgage Federation, explains how the Energy Efficient Mortgages Initiative (EEMI) has moved the dial on sustainable finance in Europe.

The purpose of EEMI is to catalyse a new integrated multi-stakeholder energy efficient mortgage ecosystem and, by extension, improve the EU’s ageing building stock. All stakeholders, including banks, have a moral obligation to finance the energy transition. EEMI shows that good climate-sense is good business-sense by linking sustainability measures to credit risk.

Through the development of an Energy Efficient Mortgage Label and EU taxonomy compliant Disclosure Template, banks will have the tools to collect and disclose information on their green activities. This, in turn, will unlock private funding for energy transition projects and help move Europe towards carbon neutrality by 2050.

Olivier Elamine, Chief Executive of German-based REIT Alstria Office, and member of the sustainability committee of the European Public Real Estate Association, paints a less optimistic picture.

When it comes to action on emissions, he argues that the real estate sector is good at “talking-the-talk” but is yet to “walk-the-walk”. Historically low, nearly-zero interest rates, mean that plenty of money is incoming. It is not yet clear whether this investment will help or hinder the sector in its climate adaptation ambitions.

He also echoes Sean Kidney in lamenting the lack of meaningful action on embodied carbon and cites an apparent general reluctance to honestly discuss the upfront costs of decarbonisation. It is time, he says, for policymakers to be decisive and introduce potentially unpopular but desperately necessary measures – including carbon taxes.

It is time for policymakers to be decisive and introduce potentially unpopular but desperately necessary measures – including carbon taxes.

One way to address these challenges, believes Elamine, is through investor stewardship, as described in the UN Principles for Responsible Investment (PRI). By enabling a two-way dialogue, PRI helps companies and investors to co-create more climate-conscious and socially responsible projects.

Ella Etienne-Denoy is CEO of Green Soluce, a Paris based consulting firm helping private and public organisations to make sustainability happen. She presents the key findings of a recent study on ESG trends in real estate investment, based on input from the non-listed investment sector.

The findings support the insights of her fellow panellists. She furthermore points to increased investor demand and lesser risk as the two main drivers of the recent ESG boom. The complexity of processes and the sheer number and variety of ESG frameworks remain the principal challenges.

That real estate and construction remain largely localised businesses underscores the need for greater consistency between national and EU green regulations. The EU taxonomy is a system that can move the question forward by providing a single market standard. But, as it stands, the legislation is imperfect.

It is though, certainly a pathfinder; policymakers can be excused for failing to get it absolutely right at the first time of trying. The EU’s bold climate ambitions are now underpinned by expansive, if flawed, legislative frameworks. July 2021 has been a landmark month for climate action in Europe.