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EU Sustainable Finance Taxonomy Regulation

From the point of view of life-cycle GHG emissions for buildings and construction related sectors

The EU Sustainable Finance Taxonomy aims to create a classification system of sustainable activities and is set to transform investment and reporting to help the EU reach its target of carbon neutrality by 2050.  

The EU Sustainable Finance Taxonomy (shortened to the Taxonomy), or Regulation (EU) 2020/852 is a sustainability classification system for economic activities and sectors essential to climate change mitigation and adaptation.

It makes it possible to distinguish sustainable activities for the purposes of compliance and to identify sustainable investments. In essence, it provides sector-specific sustainability benchmarks.

The Taxonomy will be an essential tool for all types of investors and financial market participants (asset owners, asset managers, insurance companies and banks) as well as listed companies and large companies operating in the Taxonomy-covered sectors with business in the European Union.

The Taxonomy is the underpinning technical method for a number of key regulations, as shown below. 

Regulation

Role of the Taxonomy

Sustainable Finance Disclosure Regulation (SFDR) Compulsory for financial market participants as of 10 March 2021
Green Bond Standard (GBS) and the EU Green Bond Framework EU Taxonomy requirements used to define eligibility criteria
Non-Financial Reporting Directive (NFRD) Supports reporting requirements
Task Force on Climate-related Financial Disclosures (TCFD) Disclosures need to be aligned with the Taxonomy
European Green Deal A tool to scale up sustainable investment  to implement the EU Green Deal

Read more about the growing number of other policies and legislation regulating embodied carbon in construction here.

Environmental objectives

In order to be Taxonomy-eligible, an economic activity must contribute substantially to at least one of the six environmental objectives of the European Green Deal and do no significant harm to the others, as well as meeting minimum social safeguards.

  • 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

The requirements have so far been published for climate change mitigation and adaptation, and are forthcoming for the rest. The technical screening criteria for the Taxonomy have been developed by the EU Technical Experts Group, and are continuously updated by the independent platform on sustainable finance.

The Taxonomy has been in force since 12 July 2020 and the screening criteria were issued on 20 April 2021. Financial market participants are required to disclose their activities compliance with criteria for climate change mitigation or adaptation by 31 December 2021, and companies during 2022. Reporting for the financial year 2022 would have to cover all six environmental objectives.

Taxonomy requirements for companies and financial market participants

The Taxonomy affects companies offering financial products, including pension funds, and non-financial companies with over 500 employees (as covered by the EU Non-Financial Reporting Directive), and EU member states setting public measures, standards or labels for green financial products or green corporate bonds.

All companies subject to the Taxonomy will need to describe how and what share of their activities are Taxonomy-aligned for the financial year 2021 to be reported during year 2022. For non-financial companies, the disclosure must include:

  • the proportion of turnover aligned with the Taxonomy; and
  • the amount of capital expense (capex) and, if relevant, operating expense (opex) aligned with the Taxonomy.

Financial market participants subject to the Taxonomy will be required to complete their first disclosures for the activities that substantially contribute to climate change mitigation and/or adaptation, by the end of 2021. For each relevant product, the financial market participant is required to state:

  • how and to what extent they have used the Taxonomy in determining the sustainability of the underlying investments;
  • to which environmental objective(s) the investments contribute; and
  • the proportion of underlying investments that are Taxonomy-aligned, expressed as a percentage of the investment, fund or portfolio. This disclosure should include details of the respective proportions of enabling and transition activities, as defined under the Regulation.

This article does not cover issuance of bonds under the Green Bond Standard, which can be carried out by both public and private organisations.

 

Screening criteria for climate change mitigation and adaptation

The Taxonomy focuses on seven main sectors, Manufacturing, Buildings, Energy, ICT, Agriculture, Water and Transport of which the first four are the focus of this article. The Taxonomy sets Do No Significant Harm (DNSH) requirements for each type of activity, below only the climate change mitigation and adaptation requirements are outlined. Note that several sectors have alternative compliance methods besides the one based on GHG emissions accounting, the below summary only concerns the GHG emissions-based compliance.

1. Manufacturing

  • Basic construction materials, including, cement, aluminium, iron and steel apply manufacturing GHG emissions thresholds compatible with the EU Emission Trading system mechanism using the physical measurement of emissions (2019/331)
  • The manufacturing of energy efficiency equipment for buildings applies thresholds set using product category specific energy efficiency classes and U-values
  • A number of other key manufacturing sectors, including other low carbon technologies, hydrogen, organic basic chemicals and plastics in primary form apply a limit on life-cycle GHG emissions (refer to calculation method later)

2. Buildings

Refers to construction and real estate activities, also when used in other sectors.

  • The construction of new buildings requires energy efficiency at least 10 % above the national near-zero energy building benchmark, and for buildings over 5000 m2, the life-cycle Global Warming Potential of the building is calculated for each stage in the life cycle and disclosed to investors and clients on demand (refer to calculation method later). Also, air-tightness and thermal integrity must be tested.
  • The renovation of existing buildings must either comply with major renovation regulations, or reduce primary energy demand by at least 30 %.

3. Electricity, gas, steam and air conditioning supply

  • Most energy renewable energy generation mechanisms, including electricity from hydropower, geothermal energy, renewable non-fossil gaseous and liquid fuels, co-generation from geothermal energy, and production of heat/cool from geothermal energy apply a life-cycle GHG emissions limit of 100gCO2e/kWh (refer to calculation method later)

4. Innovative technologies

  • Both near-market research, development and innovation as well as research, development and innovation for direct air capture of CO2 are also benchmarked based on life-cycle GHG emissions but no limits are set.

 

Meeting the climate change mitigation screening criteria

GHG emissions-based calculation criteria for the Taxonomy Climate Change Mitigation screening criteria based on Annex I of the Delegated Act published on 21 April 2021 are as follows:

Activity

Calculation method

Verification

Threshold

Manufacturing: low carbon technologies, hydrogen, organic basic chemicals and plastics in primary form Life-cycle GHG emissions calculated using Commission Recommendation 2013/179/EU or ISO 14067:2018 or ISO 14064-1:2018. Third party verification required Varies by product
New building construction (buildings over 5000 m2) The GWP calculated for each life cycle stage as kgCO2e/m2/a (of useful internal floor area) for a study period of 50 years. The data selection, scenario definition and calculations in accordance with EN 15978:2011. The scope as defined in the Level(s) EU framework for indicator 1.2. None currently None currently
Renewable energy generation, including electricity from hydropower, geothermal energy, renewable non-fossil gaseous and liquid fuels, co-generation from geothermal energy, and production of heat/cool from geothermal energy. Life-cycle GHG emissions savings are calculated using the methodology referred to in Article 28(5) of Directive (EU) 2018/2001 or, alternatively, using ISO 14067:2018 or ISO 14064-1:2018.

Quantified life-cycle GHG emission savings are verified in line with Article 30 of Directive (EU) 2018/2001 where applicable, or by an independent third party.

Third-party verification required Mostly, < 100gCO2e / kWh

How can One Click LCA help?

One Click LCA supports these Taxonomy-relevant sectors with the following tools:

Given that the Taxonomy thresholds are based on best practices, and they can be updated by the implementation advisory body, the Sustainable Finance Platform, for example, it is conceivable that new buildings will have embodied carbon limits applied to them in a near future.

Research

Embodied Carbon Review

Embodied Carbon Review One Click LCA

Article

Unregulated energy use and carbon emissions from buildings – and how it is changing

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