Classified as green? Effects of the EU taxonomy regulation on sustainability reporting in the construction and real estate industry

Abstract

The EU has initiated multiple sustainability-related initiatives in the past few years to meet the goals of e.g., the “European Green Deal”, which aims to make the European continent fully emission neutral by 2050. Related to these, one goal of the European Commission is to funnel investments into sustainable activities, which is why it created the sustainable finance taxonomy regulation (EU) 2020/852, better known as the “EU Taxonomy”, which is, in essence, a list of technical criteria for classifying specific economic activities as sustainable in certain industry sectors. It obligates companies to disclose the sustainability of these activities as a part of their sustainability reporting. First EU Taxonomy related sustainability reports were published in 2022, with additional requirements and amendments coming in later in the following years.

This paper first examines the latest development of the EU Taxonomy, the timeline of the regulation, and the surrounding sustainability reporting legislation and framework. Once these have been defined, the research will look into the effects that the EU Taxonomy has already had on companies’ sustainability reporting, especially in the construction and real estate industry. Thereafter, the paper will analyze the future development of the imposed sustainability reporting requirements and determine ways in which construction and real estate companies can better prepare for EU Taxonomy-aligned sustainability reporting and other requirements.

The research suggests that companies are only in the early phase of implementing the EU Taxonomy. In the construction and real estate industry, companies have reported high EU Taxonomy eligibility, meaning that a lot of their economic activities are within the scope of EU Taxonomy. This does not mean that these activities are sustainable, but from 2023, companies will have to start reporting whether these activities are “green” under the EU Taxonomy criteria.

Moreover, EU Taxonomy sustainability reporting carries the potential to be a useful financing tool and a set of goals to include in company strategies, but it also adds exceptionally complicated layers to sustainability reporting, by e.g. requiring companies to base their Taxonomy reporting on actual data, which might not even exist yet. Going forward, as the EU Taxonomy is supplemented and amended, companies will have to stay alert and start preparing for future reporting requirements.