• Raluca Carp Hengy, Managing Director |

Since the EU Taxonomy regulation entered into force on 1 January 2022, real estate companies have been busy not only preparing their disclosures but also getting a grasp on the impact the EU Taxonomy has had on their operations and accounting processes.

While expecting clarifications from the authorities and the final regulation package, it’s a clear sign for added transparency for real estate companies.

Real estate companies should consider adding more transparency in their policies and regulations while expecting clarifications from authorities and the final regulation package.

The EU Taxonomy means growing sustainability disclosure requirements for:

  • Corporate companies, who fall under the NFRD [1] and CSRD [2], to needing to report on the level of turnover, CapEx and Opex KPIs, which are eligible and aligned according to the EU Taxonomy criteria.
  • Financial market participants, who offer products classified as environmentally sustainable under the SFDR [3], to report on the level of the portfolio aligned with the EU Taxonomy criteria.

What is the EU Taxonomy?

The EU Taxonomy completes the Sustainable Finance Regulatory package by providing a common language to define economic activities that are deemed to contribute to environmental objectives and to reduce the risk of greenwashing financial products. For economic activities that are within the scope of the EU Taxonomy (eligible activities) a set of Technical Screening Criteria has been defined to demonstrate substantial contribution to at least one of the six environmental objectives and for not significantly harming any of the other environmental objectives, as outlines in Figure 1.

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As such, the EU Taxonomy sets out four main steps described in Figure 2, which need to be met for an eligible economic activity to be considered as an environmentally sustainable economic activity, i.e. to be considered as an aligned economic activity:

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How is the EU Taxonomy impacting the real estate sector?

The real estate sector has been the primary focus for the ESG transformation as it’s responsible for 40% of energy consumption and 36% of greenhouse gas emissions in the EU. These estimations are driven by the construction, usage, renovation, and demolition of real estate assets. Therefore, real estate companies’ transformation into a sector that includes/prioritizes sustainable activities is a key step in achieving national and European carbon-neutrality targets.

Real estate companies identified as Public Interest Entity with more than 500 employees, as per NFRD, fall under the EU Taxonomy disclosure requirements for eligibility (since 2022) and alignment for every disclosure done after 1 January 2023. The CSRD will replace the NDFR for the 2024 financial year extending the obligations in terms of reporting content as well as external assurance. By 2025, large undertakings will be added, extending it to all listed companies by 2026, and certain SMEs.

How will real estate sector demonstrate eligibility and alignment with the EU Taxonomy?

EU Taxonomy eligibility

The eligible activities for both real estate and construction are grouped together and included in Section 7 of the TSC and comprises of seven activities:

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Mapping is a key tool in identifying which of the companies’ activities are eligible under the EU Taxonomy criteria. To succeed, you need to identify NACE codes or the description of the economic activity which is associated with and correspond to one eligible economic activity. The corresponding percentage turnover, CapEx and OpEx is then reported as eligible. Only eligible activities can be subject to the alignment assessment, following the TSC requirements to demonstrate:

  • Step 1: substantial contribution to one of the six environmental objectives
  • Step 2: DNSH any of the other objectives and
  • Step 3: Compliance with minimum social safeguards as per Figure 1.


EU Taxonomy alignment

For example, for the eligible activity 7.7 Acquisition and Ownership of buildings, we will identify some of the requirements for each step to demonstrate its alignment with the EU Taxonomy criteria for the CCM objective.

Step 1: Substantial contribution to the CCM objective

Part of the TSC to demonstrate the substantial contribution check to the CCM objective would require information on and positive answers to the following questions (not limited to):

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Step 2: DNSH

The only DNSH check to be performed is related to CCA in this case. For this check, the economic activity needs to comply with the criteria set out in Appendix A of the EU Taxonomy Climate Delegated Regulation. It details a non-exhaustive list of the “Climate-related hazards”.

To ensure that the activity does not significantly harm the CCA, it should be verified that adaptation solutions are put in place to tackle the climate risk hazards which have been assessed as “material”.

Step 3: Compliance with minimum social safeguards

Finally, to align an economic activity with the EU Taxonomy, the activity should be carried out in compliance with minimum safeguards, as indicated by Article 18 of the EU Taxonomy.

The minimum safeguards refer to the requirements, principles and guidelines that are set within OECD Guidelines on MNEs and the UN Guiding Principles on Business and Human Rights.

Once the above steps are documented, corporate companies can report on their environmental performance to their stakeholders and financial institutions. The Delegated Act of Article 8 of the EU Taxonomy specifies that content and presentation of information is to be disclosed i.e. the percentage of its Turnover, CAPEX and OPEX which is eligible and aligned with the EU Taxonomy.


While certain real estate companies are obliged to report on eligibility and alignment percentages, there is no obligation to reach a certain percentage of alignment with environmental objectives. However, it is highly important for any real estate company to identify environmental factors which may impact financial rations and models. Following the above process and identifying the gaps between the current business against the TSC requirements can provide the real estate sector actors with valuable insights on the business risks and financial impacts. Some of these environmental risks that could have a financial impact on the business are:

  • High GHG emissions could lead to a decrease in revenue from high carbon activities or buildings. It could further require increased CapEx investments to reduce the GHG emissions per unit.
  • Any kind of pollution that the real estate activity/asset might cause could lead provisions/asset to write-offs or impairments of the asset value. The risk of non-compliance with the regulations could also lead to potential fines, litigations, or an impact on taxes. Financial costs could increase given the low credit rating (non ESG loan) as well as interest rates.
  • Increased temperatures require much more energy or fuel, and therefore an increase in OpEx.
  • Climate hazards can lead to disruptions of the business, with negative impacts on revenues and profitability. It could require significant CapEx for repairs, compared to the CapEx required for prevention. Asset book values could also be impacted in case of high environmental risks linked to the assets.

If you encounter challenges during the EU Taxonomy eligibility and alignment assessments, or if you want to understand the gaps of your business or the targeted business against the EU Taxonomy TSC criteria, do not hesitate to contact us!

[1] NFRD – Non-Financial Reporting Directive
[2] CSRD – Corporate Sustainability Reporting Directive
[3] SFDR – Sustainable Finance Disclosure Regulation

This article was written in collaboration with Julie Castiaux.