Understanding the EU Taxonomy and how it affects you and the construction industry

We will look at the EU Taxonomy and its importance for the construction industry in this article. 

• What does the word “taxonomy” actually mean?

The word “taxonomy” originally comes from biology, where it refers to the science of classification, especially of organisms. In a broader sense, taxonomy is a system for classifying and organising things or concepts, usually in a hierarchical structure. In the case of the EU Taxonomy, it is a classification system for economic activities, and defines their level of environmental sustainability.

• What is the background to the EU Taxonomy?

The EU Taxonomy arose from the EU’s climate strategy, which is known as the EU Green Deal. The aim is to direct financial capital towards sustainable investments, thereby achieving climate neutrality by 2050. As part of a larger package of legislation, the EU has therefore defined a taxonomy, which is used to assess whether an activity can be considered to be environmentally sustainable. The full name of the taxonomy is the EU Sustainable Finance Taxonomy, or Regulation (EU) 2020/852, and the first part of it (the first two environmental objectives) came into force in law in January 2022.

• What requirements does the taxonomy impose on companies?

For an activity to be classified as being sustainable according to the taxonomy, it must make a significant contribution to one or more of the following environmental objectives:
1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems

Furthermore, the activity must “Do No Significant Harm” (DNSH) to any of the other environmental objectives. A further requirement is that the activity must fulfil minimum standards regarding social sustainability. Criteria have currently only been defined for the first two environmental objectives, i.e. those related to climate change. Criteria for environmental objectives 3 to 6 are expected in 2023 and 2024.

• Does the taxonomy only apply to the construction industry?

In a first phase, the taxonomy has been developed for the seven industry sectors that are judged to have the greatest environmental impact, but it will be expanded to other industries in due course.

The industry sectors involved in the first step are:
•    Construction and real estate activities
•    Agriculture, forestry and fisheries
•    Manufacturing
•    Electricity, gas, steam and air conditioning
•    Water, sewage, waste and related remediation work
•    Transport, logistics and communication technologies

Listed companies with more than 500 employees are currently affected by the taxonomy, but a new directive, CSRD, is being introduced as part of the EU Green Deal, and this lowers the number of employees.

• Does the taxonomy apply to all construction companies?

Activities covered by the taxonomy are the construction of new buildings, renovation of existing buildings, acquisition and ownership of buildings, demolition of buildings, and installation and management of energy saving measures in buildings. In other words, a significant part of the construction industry is covered by the taxonomy, but not all of it.

• What do companies have to report?

So far, the required level of detail is not especially high. Companies affected by the taxonomy must describe to what extent they fulfil the taxonomy in their sustainability reports for 2022. The turnover, CapEx (investment costs) and OpEx (operating costs) covered by the taxonomy have to be reported. More reporting requirements will then be gradually introduced from 2023.

• What are the direct benefits of the taxonomy?

The main aim is to achieve the climate targets agreed by the EU Member States. As the construction industry is one of the largest industry sectors and has a high impact on the environment, changes in it can have a significant effect. Sustainability requirements for new buildings and renovations will make a significant contribution to both mitigating and adapting to climate change. The taxonomy also helps companies support a circular economy and both directly and indirectly protect biodiversity and ecosystems. 

• What are the main consequences for the construction industry?

• Changes in construction methods, materials and design
• The availability of certain types of financing or investments; investors are becoming increasingly interested in financing projects that are environmentally sustainable
• Companies have to be more transparent about their sustainability efforts
• The taxonomy can encourage innovation in sustainable construction technologies and methods
• Initially, the taxonomy may result in additional costs, but in the long term sustainable practices often lead to cost savings, for example as a result of improved energy efficiency
• Companies that are early adopters of sustainable practices that are in line with the EU Taxonomy can gain a competitive advantage in the market
• Suppliers of construction materials may also have to adapt to meet sustainability criteria, which will affect the entire supply chain

To summarise, the EU Taxonomy has the potential to have a significant effect on the construction industry, both by pushing it to adopt more sustainable practices and by posing challenges that need to be addressed.

• Where can I find out more about the taxonomy?

More information about the taxonomy is available on the EU’s website.