The EU Taxonomy is a classification system for environmentally sustainable economic activities including real estate. It was created to support the Sustainable Finance Disclosure Regulation, aimed at bringing transparency and preventing greenwashing around sustainability claims made by financial market participants. The Taxonomy aims to provide a common language and a set of criteria - called technical screening criteria (TSC) - for identifying and promoting activities that contribute to the transition to a low-carbon, resource-efficient ,and socially inclusive, economy.

The real estate industry is one of the worst polluting industries and how real estate  funds invest plays a significant role in the transition to a sustainable economy. The aim of the taxonomy is to encourage investing in properties that are designed and managed in an environmentally and socially responsible manner. The TSC provides a framework for evaluating the sustainability of real estate investments, including both new developments and existing buildings. It also covers renovation of old buildings where there are strict criteria covering the amount of efficiency that needs to be achieved from any work or investment taking place to qualify. 

Regulation (EU) 2020/852 sets out the criteria that real estate funds must meet in order to be considered environmentally sustainable for SFDR purposes. At the top level, any investment in an economic activity needs to substantially contribute to one of the environmentally-sustainable objectives while not significantly harming any of the remaining five objectives to qualify. Generally speaking, for real estate funds to qualify this means a fund must invest at least 70% of its assets in properties that meet certain environmental and social criteria, with stricter criteria for more narrowly defined funds.  The six environmental EU taxonomy criteria are set out below, however only the first two categories have had their technical screening criteria defined and are live.

1. Climate change mitigation: investments must contribute to the reduction of greenhouse gas emissions, including through energy efficiency measures and the use of renewable energy sources.
2. Climate change adaptation: investments must contribute to the resilience of buildings and infrastructure to the impacts of climate change.

The following four categories are yet to have their technical screening criteria fully defined, but we expect them to  address the following topics both for in-use and new buildings:

3. Sustainable use and protection of water and marine resources: investments must contribute to the sustainable use and protection of water resources and the marine environment.
4. Transition to a circular economy: investments must contribute to the transition to a circular economy, including through the use of recycled materials and the design for disassembly and reuse of buildings and infrastructure.
5. Pollution prevention and control: investments must contribute to the prevention and reduction of pollution, including through the use of low-emitting materials and the implementation of waste management systems.
6. Protection and restoration of biodiversity and ecosystems: investments must contribute to the protection and restoration of biodiversity and ecosystems, including through the use of green infrastructure and the integration of nature-based solutions into the design of buildings and infrastructure.

The full force of the Taxonomy is yet to be felt, pending agreement of the other four categories. These are also only environmental criteria, and social and governance criteria will follow.

Additionally, real estate funds must also demonstrate that they have considered and addressed any potential negative social impacts of their investments. This includes considering the potential impact on local communities, workers and human rights. We expect to hear more on a social taxonomy in the coming year though in reality getting full agreement from all member states on the social taxonomy is some way off.

Even though much of the  EU Taxonomy is still to be finished, it nevertheless represents a significant step forward in promoting sustainable real estate investments and supporting the transition to a low-carbon, resource-efficient and socially inclusive economy. It provides a clear framework for evaluating the sustainability of real estate investments for investors and is already encouraging real estate funds to adopt more sustainable practices. We expect to see a lot more regulation in this space over the next few years, not to mention other jurisdictions developing their versions too.

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