Schoenherr is a full-service law firm with a footprint in Central and Eastern Europe providing legal advice to local and international companies. Elena Todorova ([email protected]) is a counsel with over 16 years’ experience acting on all matters of real estate, such as investment acquisitions and disposals, construction, and agricultural land management. Ayla Ilicali ([email protected]) is a counsel specialising in corporate real estate (transactional work, international portfolio deals) as well as real estate related securitisation in connection with the reorganisation of financings.
1. Sustainability as a "megatrend"
"Megatrends" are defined as powerful, multi-decade forces that reshape civilisations. They are the result of slow evolution but have a dramatic effect on all facets of society.
Sustainability is a megatrend. It is not a passing fad and has been in the focus of global development for the last 10 years.
It is one of the goals of the Paris Agreement on avoiding climate change (2015) and a defining value for the National Climate Action Plans of countries globally. In the EU, sustainability is at the heart of the Green Deal (2019), also defined as a "technique" for channelling private sector cash flows to finance sustainable economic activities.
In other words: sustainability is here to stay.
2. EU legal framework
The EU sustainability legislation consists of three main components:
2.1 The Sustainable Finance Disclosure Regulation establishes a reporting framework for capital management companies and real estate investment funds, among others. They are obliged to share information on strategies for incorporating sustainability risks into their investment decision-making or advisory process.
2.2 The Corporate Sustainability Reporting Directive, in force since January 2023, introduces reporting obligations for the social and environmental policies of all companies covering at least two of the following criteria: i) net sales of EUR 40m; ii) a balance sheet total of EUR 20m; and iii) 250 employees on average during the fiscal year.
2.3 The EU Taxonomy Regulation provides financial market players with a classification system and criteria which must be met for an economic activity within the EU to be environmentally sustainable.
3. Taxonomy (the classification system)
Real estate management companies and investment funds may easily become addressees of the obligations under the Corporate Sustainability Reporting Directive. Its criteria are objective and straightforward.
But how can one determine whether a certain real-estate-related economic activity is environmentally sustainable (or in other words bankable)? Under the EU Taxonomy Regulation such an activity must:
-- meet the minimum social standards set by the EU;
-- not cause significant harm to any environmental objects;
-- meet the evaluation criteria set by the European Commission; and
-- make a substantial contribution to at least one of the following six environmental objectives: climate change mitigation and adaptation; sustainable use and protection of water and marine resources; circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems.
For each of the above listed objectives the European Commission sets up a Delegated Act with precise technical assessment criteria for six business sectors, including building management and construction.
4. Effect on buildings and construction
Why buildings? At least 40 % of total energy consumption is related to buildings. This places the sector among those most susceptible to change to meet the sustainability criteria.
The legislation sets the mandatory framework, but the financing institutions and investment funds are those who will enforce it through their financial products.
What are the goals? The primary energy demand of buildings newly built after 2021 must be 10 % below the national requirements for lowest energy buildings. Buildings built before 2021 require a Class A energy certificate or proof that the building is in the top 15 % of the national building stock.
Construction planning is also affected. For example, the relevant Delegated Act contains requirements for the water flow rate of faucets and showers and the maximum flushing volume of toilets.
5. Greening the grey?
So, you are the happy owner of a building that unfortunately does not meet the sustainability criteria. Whether it is an industrial, commercial, or residential building our advice is the same: start planning now for the time when financing your property will be problematic.
What are the options? You can:
- Renovate and certify your property (e.g. with one of the following certificates: BREEAM, LEED, DGNB). Currently there are national and EU-funded grant programmes. The timely planning of the renovation activities is key.
- Consider a new construction or sell the building – renovating/purchasing existing buildings and certifying them according to the sustainability criteria is gaining momentum as a niche market.