EU Taxonomy in Construction & Real Estate Sectors: 9 Facts you Should Know

After two years of EU Taxonomy reporting, it is time to reflect on the insights derived from these past reports. Our team of Sustainability and ESG data experts delved into previous reports to extract valuable information about the practical application of the EU Taxonomy in a critical sector of our economy.

In this first sectoral analysis, we will focus on the construction & real estate sectors. This industry has a crucial role to play in the transition to a low-carbon world as it contributes to approximately 40% of global CO2 emissions (70% through building operations and 30% through construction), as reported by the UNEPFI. Consequently, it is particularly interesting to evaluate the sectors' current alignment with the EU Taxonomy, designed to guide companies to achieve carbon neutrality by 2050.

In this article, we will compare the EU Taxonomy results of the construction & real estate sectors with other industries, assess the company reporting practices, and the principal pain points for alignment.

Let’s explore 9 key findings resulting from our analysis of reports submitted by non-financial companies within the construction & real estate sectors.

1. Sectoral Comparison: High Eligibility and Alignment Scores for the Construction & Real Estate Sector
2. Implications of the Eligibility and Alignment Scores for Reputational Risk and Access to Financing
3. Most Frequently Selected Activities in the Construction & Real Estate Sectors
4. What’s New? Additional Activities and Environmental Objectives
5. Focus on Top Three Activities: Alignment Levels of Construction, Renovation and Building Ownership
6. Top Three Activities: Main Reasons for Non-Alignment with Substantial Contribution Criteria
7. Top Three Activities: Main Reasons for Non-Alignment with Do No Significant Harm (DNSH) Criteria
8. Top Three Activities: Main Reasons for Non-Alignment with Minimum Social Safeguards Criteria
9. Other Practical Pain Points

‍

Download our free e-book to learn the Essentials of the EU Taxonomy.

1. Sectoral Comparison: High Eligibility and Alignment Scores for the Construction & Real Estate Sector 

Let's begin by assessing the current state of alignment of the construction & real estate sectors with the EU Taxonomy. 

Based on our research, it appears that real estate displays by far the highest EU Taxonomy eligibility rate compared to other sectors, with an average turnover eligibility of 87% while the overall average eligibility is equal to 27%. The construction sector lies in the third position with an average turnover eligibility of 47%.

Regarding turnover alignment, construction & real estate companies occupy the second and third positions, with 19% and 15% respectively, above the overall average alignment of 9% but far behind the energy sector with its 47% alignment.

Similar figures and trends are observed for the company expenditures. Real estate displays the highest eligibility with 89 and 82% of eligibility and the second highest alignment with 24 and 14%, for CapEx and OpEx respectively. Construction companies display CapEx and OpEx eligibility of 48 and 19% (fourth and fifth positions) and alignment of 15 and 12% (fourth position).

2. Implications of the Eligibility and Alignment Scores for Reputational Risk and Access to Financing

The notable high eligibility score in these two sectors carries significant implications: it indicates that a substantial share of the companies’ turnover and expenses can be assessed against sustainability criteria. 

For companies demonstrating particularly sustainable practices, this is promising news as it positions them to reach remarkably high alignment levels. For several sectors that are not (yet) covered by the EU Taxonomy (i.e. their activities are not Taxonomy-eligible), it is currently impossible to be aligned even if the company features the highest sustainability standards. For companies with a lower emphasis on sustainability, there is a noteworthy reputational risk as the gap between them and more sustainable companies is likely to be significant.

The fact that the alignment level of the sector is above the average alignment value means that construction & real estate companies could attract financing more easily or with better interest rates. Indeed, banks also have to report their Taxonomy alignment, which is the consolidated score of all their clients and, therefore, they will tend to favour clients with higher alignment. However, this positive outcome has to be put in perspective of the high sector eligibility. 

Indeed, as depicted by the sectoral eligibility score, most construction & real estate activities are already covered by the EU Taxonomy, and therefore, only an increase in the sustainability of the activities could generate higher alignment. In less covered sectors, both the eligibility and alignment could greatly increase with the introduction of new activities. Furthermore, several key alignment criteria of the construction & real estate sectors will evolve with time and become more stringent. Therefore, the current good alignment score compared to the other sectors could disappear quickly.

3. Most Frequently Selected Activities in the Construction & Real Estate Sectors

Let's now turn our attention to the most frequently chosen activities within the construction and real estate sectors in the table below. Whether you are generating your initial EU Taxonomy report or seeking assurance that you have not overlooked a potentially eligible activity, this information will prove valuable in your compliance journey. 

4. What’s New? Additional Activities and Environmental Objectives

So far (until the 2023 reporting exercise for the financial year 2022), only activities with a substantial contribution towards the climate change mitigation (CCM) and adaptation (CCA) objectives could be selected. 

When looking at the reports of construction & real estate companies, the climate change mitigation objective has virtually been the only one selected. Around 5% of the construction companies in our set of reports reported some eligibility towards the climate change adaptation objective. 

Starting this year (2024 reporting exercise on the financial year 2023), the four new environmental objectives can be selected. Among these, only the circular economy objective has led to the creation of new activities directly linked to the construction & real estate sectors. 

The activities are the following:

• Construction of new buildings (already eligible under the CCM and CCA objectives)
• Renovation of existing buildings (already eligible under the CCM and CCA objectives)
• Demolition and wrecking of buildings and other structures
• Maintenance of roads and motorways
• Use of concrete in civil engineering

Other new activities can be indirectly related to the construction sector through the construction of facilities with a specific purpose. These activities are the following: 

• Water supply (water and marine resources)
• Urban waste water treatment (water and marine resources)
• Sustainable urban drainage systems (water and marine resources)
• Nature-based solutions for flood and drought risk prevention and protection (water and marine resources)
• Phosphorus recovery from waste water (circular economy)
• Production of alternative water resources for purposes other than human consumption (circular economy)
• Treatment of hazardous waste (circular economy)
• Recovery of bio-waste by anaerobic digestion or composting (circular economy)
• Depollution and dismantling of end-of-life products (circular economy)
• Sorting and material recovery of non-hazardous waste (circular economy)

5. Focus on Top Three Activities: Alignment Levels of Construction, Renovation and Building Ownership

We will now focus on the three most representative and reported activities of the construction & real estate sectors: the construction of new buildings, the renovation of existing buildings and the acquisition and ownership of buildings. We will first analyse the extent to which companies manage to meet the EU Taxonomy requirements then will move to the key reasons for non-alignment in the next sections.

The activity construction of new buildings includes both the development of construction projects and the construction of buildings. 16.2% of the turnover linked to that activity is aligned. In other terms, 83.8% of the turnover generated from the construction of new buildings does not meet the sustainability criteria of the EU Taxonomy.

For the activity renovation of existing buildings defined as “Construction and civil engineering works or preparation thereof”, the situation is worse with an alignment observed only for 9.5% of the turnover.

Finally, the situation is more favourable for the activity acquisition and ownership of buildings, which definition is “Buying real estate and exercising ownership of that real estate”. Indeed, nearly one-third (31.2%) of the turnover in the activity is aligned with the Taxonomy criteria.

Let’s delve into the reasons behind the low alignment level for these highly represented activities to understand whether it arises from organisational practices or the regulatory framework. Moreover, gaining insights into the intricacies of the EU Taxonomy is crucial to help CSR teams enhance their EU Taxonomy scores.

6. Main Reasons for Non-Alignment with Substantial Contribution Criteria

Activity “Construction of New Buildings’”

For the activity construction of new buildings, a company must demonstrate that the building Primary Energy Demand (PED) is 10% lower than the NZEB value to have a substantial contribution to the CCM objective. Additionally, large buildings have to conduct testing for air-tightness and thermal integrity and calculate the building life-cycle Global Warming Potential (GWP). 

From our research, it appears that the main reason for non-alignment is coming from the building energy criterion. Insufficient energy performance appears to be the primary reason but also some types of buildings do not receive PEDs or because the NZEB calculation methodology does not allow to calculate the 10% reduction required. Still, it is worth noting that two companies failed because of the absence of the GWP calculation.

Activity “Renovation of Existing Buildings”

It is worth mentioning that there was considerably less information about the reason for non-compliance of the activity renovation of existing buildings compared to the other two activities. To be compliant, a company should either fulfill the local requirements for major renovations or demonstrate that the renovation reduced the PED to at least 30%. 

A practice commonly used by companies was to consider that if they did not comply with these conditions, they reallocated part of their financials towards the activity “Installation, maintenance and repair of energy efficiency equipment”.

Activity “Acquisition and Ownership of Buildings”

For the activity acquisition and ownership of buildings, substantial contribution is demonstrated either by showing that the building has an Energy Performance Certificate (EPC) class A or that its PED is within the top 15% of the regional building stock. Additionally, for large buildings, energy performance has to be monitored and assessed. The vast majority of the non-alignment comes from the first criterion described. 

Usually, companies first assess what buildings have an EPC class A and, if it was not the case, they used the 15% approach. This second option is usually easier to comply with but the difficulty lies in finding the value. Some countries possess national statistics (France, Austria, Sweden) that were used to demonstrate compliance but in other countries, other sources of information (e.g. reports from real estate associations), expert reports or internal company analyses were used.

7. Main Reasons for Non-Alignment with Do No Significant Harm (DNSH) Criteria

Activities “Construction” & “Renovation of Buildings”

Note that most DNSH criteria are common for the activities construction and renovation of buildings, which is why they will be analysed together. They cover a Climate Risk Assessment (CCA), water consumption of water appliances (water), the preparation for reuse, recycling and recovery of the waste generated on the site (circular economy), the absence of use of hazardous substances (pollution prevention), the assurance that the building is not constructed on land types that have a high biodiversity and ecosystems value (biodiversity, for the construction activity only).

Surprisingly, the reasons for non-alignment regarding the DNSH criteria vary a lot between companies, as much as the justifications for compliance. This demonstrates that the construction sector is still in need of additional guidance. 

The circular economy criterion of 70% of waste preparation for reuse, recycling, and recovery was the most reported reason for non-alignment, especially for the renovation activity. In second place, the pollution criterion was also a widespread reason for non-alignment, often for practical reasons (no access to the list of substances, no control over what substances are used, and tasks excessively time-consuming) pushing the company to adopt a prudential approach. 

The water and biodiversity criteria were generally less blocking for companies except buildings constructed or renovated outside of the EU. Indeed, these criteria are related to European directives, which require a lot of work for non-EU buildings to assess whether the regional regulations fulfilled the European requirements, which very often led to the simple consideration that non-EU buildings were not aligned.

Activity “Acquisition and Ownership of Buildings”

Finally, the Climate Risk Assessment (DNSH for CCA), which is the only DNSH criterion for the activity acquisition and ownership of buildings, for some companies, discarded from alignment most of the company buildings while for others, no single building was considered non-aligned. The discrepancy arises from the lack of clear guidelines on how to conduct a climate risk assessment and the absence of indications regarding the acceptable level of risk for alignment.

8. Main Reasons for Non-Alignment with Minimum Social Safeguards Criteria

Within the analysed set of companies, there are very few examples of non-compliance with the Minimum Social Safeguards (MSS). All companies conducted the alignment assessment of the MSS criteria at the company level. Some considered themselves as aligned even if they recognised that some additional work would be required for some aspects such as the due diligence processes for human rights or the integration of suppliers. Finally, one company that was found in violation of bribery reduced its alignment for the activities linked to the department where the bribe had been accepted.

9. Other Practical Pain Points

For construction and renovation, a recurring issue for companies providing services based on public tenders is that they have little influence on the project design and are often only responsible for the construction of the facilities. As a result, they can hardly influence the sustainability of the project and they lack information about the operations or the equipment used. 

Another problematic case is for companies that are only responsible for the construction of individual parts of buildings. Again, it can be challenging for them to collect information to demonstrate their alignment.

Additionally, several criteria (e.g. criteria linked to the EPCs, NZEB values) depend on regulations that are transposed at the national or regional level. This can generate criteria inconsistencies (for example, Germany does not use letters for their EPCs). Finally, the workload to find these values or thresholds can be significant as they can be stored in regional law texts in the national language.

EU Taxonomy Reporting in Construction & Real estate Sectors: Key Insights

In this sectoral analysis of the EU Taxonomy for the construction and real estate sector, we have uncovered a set of insightful elements:

• The sectors display very high eligibility scores and alignment levels above average. This offers the sector good financing perspectives.
• The EU Taxonomy covers construction & real estate activities much more than other sectors. If this happened to change, the alignment advantage of the sector could quickly disappear.
• The blockers for higher alignment come either from the substantial contribution (SC), the Do No Significant Harm (DNSH) criteria, or both. 
• Improving the alignment to the SC criteria related to energy performance will depend on the market's willingness to pay for buildings with high-energy performance. 
• Improving the alignment to the DNSH criteria related to construction practices is less market-dependent as construction companies better control them.

Greenomy: The Ally of Construction and Real Estate Companies for ESG Reporting

Greenomy is your pioneering all-in-one solution to streamline CSRD/EU Taxonomy reporting and accelerate your green transition. Our team understands that compliance differs from sector to sector, which is why our reporting platform is, among others, tailored to construction & real estate companies. 

More specifically, our solution provides the necessary research and best practices that organisations need to answer the EU Taxonomy alignment criteria. This includes expertise on how data from real estate certifiers (e.g. BREEAM) can be leveraged, how to conduct specific tests, as well as which tools and who can conduct such tests. We also provide research data on Member States’ PED, EPC or NZEB values. 

‍Book a call with our experts for more information.