Taxonomy: The EU benchmark for climate protection

For an activity to be included in the taxonomy, i.e. classified as sustainable, it needs to make a substantial contribution to at least one of the six ecological goals defined in the taxonomy and must not harm any of the other goals. The latter is known as the Do No Significant Harm rule, or DNSH rule for short. The taxonomy covers the following goals:

1. climate protection

2. adaptation to climate change

3. sustainable use and protection of water and marine resources

4. transition to a circular economy, waste prevention and recycling

5. pollution prevention and control

6. protection of healthy ecosystems

The real estate sector is categorised into four areas: new construction, renovation, purchase, existing buildings, and individual measures. Existing buildings are considered sustainable if they have an energy performance certificate, a so-called EPC rating of A. The latter would then fall into the renovation category. For new buildings, i.e. properties built from 2021 onwards, the following applies: they must consume 10 percent less primary energy than a very low-energy building according to the local definition.

DNSH rules include, for example, that the property must be resilient to climate change, based on climate projection scenarios over the life cycle of the property, but for at least 30 years from the time of investment. For new buildings and renovations, among other things, at least 70 per cent, measured by weight of construction and demolition waste, must be recycled. In addition, no asbestos or other hazardous materials may be used. In addition, water-saving fittings and water use and protection management plans are required.

Real estate funds can report the degree of compliance with the taxonomy at portfolio level as a certain percentage. For example, a portfolio is then xy percent taxonomy compliant. However, the European Union has not regulated whether and at what level funds must have a taxonomy ratio in order to be classified as an "Art.8 product" or an "Art.9 product". Since Union Investment's open-ended real estate funds for private and institutional investors have explicitly taken environmental features into account since November 2021, they are classified as sustainable products under Article 8 of the Disclosure Regulation. No changes to the existing portfolios or new negotiations with tenants have been necessary to take these environmental features into account.

The application of the taxonomy is voluntary if the investments are not explicitly designated as sustainable. Only reporting on the extent to which the properties and real estate funds are taxonomy-compliant or not is mandatory. First and foremost, the taxonomy is intended to help avoid so-called greenwashing. The danger of stranded assets is more likely to lurk in the regulation of individual legislatures.

In order to achieve the ambitious goals of the Paris Climate Agreement, laws, regulations and building codes are likely to be tightened even further in the coming years. In addition, more and more large companies are also pursuing ambitious sustainability goals and, against this background, could increase the pressure on space providers to optimise properties. In some countries, laws have already been passed whose disregard results in significant sanctions: The city of New York, for example, mandates that all buildings larger than 25,000 m2 must reduce their CO2 emissions by 40 per cent by 2030 or else face hefty fines. This is a measure that investors already have to deal with in order to ensure the resilience of their portfolio. Another example: In the Netherlands, office buildings that do not demonstrate an EPC rating of A from 2030 onwards can no longer be rented out without further ado. For non-sustainable properties or portfolios, it could well become expensive in the future and the return could come under pressure.

That is not yet clear. One thing is certain: a reduction of CO2 emissions by 80 to 95 percent and of final energy consumption by 50 percent by 2050 are the benchmarks against which the real estate industry will also be measured. After all, buildings cause about 36 percent of CO2 emissions and about 40 percent of total energy consumption within the European Union. In 2050, zero-energy buildings without greenhouse gas emissions are the measure of all things - in Germany even as early as 2045. The economic effects therefore result in particular from the gradual reduction of emissions and the resulting investments, starting with energy monitoring and extending to the increased collection or processing of the sustainability data of the property. Even an improvement in a property's EPC rating from B to A can be associated with high investments. Here it is important to find a balanced solution and minimise hurdles, for example from supervisory and tax law. Politicians in particular are called upon to make the sustainable transformation possible in the end.

The aspect of sustainability in the real estate business, particularly in connection with the EU taxonomy, is an important issue for us. We are required to live up to our responsibility and make our contribution. At Union Investment, sustainability has been a central component for around 15 years and is firmly anchored in our strategy. In the real estate sector, a team of experts has been working on the implementation and further development of the sustainability strategy on the basis of established assessment systems since 2009. In 2018, Union Investment also set itself the goal of making its global real estate portfolio climate-neutral by 2050 with its Manage-to-Green strategy. This involves not only reducing CO2 emissions, for example through the use of green electricity, but also the efficiency of the technical systems installed and therefore the overall consumption of properties in kWh/m2/a. For this purpose, we follow the so-called CRREM path (Carbon Risk Real Estate Monitor), which provides the curves for CO2 and kWh consumption for different types of use and countries.

In practical terms, the ESG criteria of a property or project development are checked in every acquisition process with the help of our in-house Sustainable Investment Check, or SI Check for short. In addition, our existing buildings are analysed once a year to identify potential for continuous improvement in sustainability performance. The SI Check covers a total of seven categories, including building structure-relevant data, operational measures and user comfort. The properties can achieve a rating between 0 and 5. This allows us to know at an early stage what the strengths and weaknesses of the building are and what needs to be done in the short or medium term.