RICS plays leading role on sustainable finance for EU buildings sector

Population growth, urbanisation and climate changes show the built environment is facing great challenges. Professionals have a great responsibility in ensuring our future is sustainable. In doing so we will also ensure real estate investments are future-proof.

As a member of the EU Technical Working Group (TEG) on Sustainable Finance appointed by the European Commission, RICS is leading on the built environment strand of a comprehensive EU strategy that fully supports the transition towards a sustainable economy, one of the key priorities of the European Commission and the UN Sustainable Development agenda.

The resulting EU classification system – the so-called “EU Taxonomy” – is a list of economic activities with performance criteria for their contribution to six environmental objectives to create a common language for all actors in the financial system. It also includes references to the International Property Measurement Standards (IPMS) as the standard for floor measurement.

Why does sustainable finance matter?

The Paris Agreement includes the commitment to align financial flows with a pathway towards low-carbon and climate-resilient development. To achieve the EU's 2030 targets agreed in Paris, a staggering investment gap estimated at €180 billion per year needs to be filled.

The financial sector has a key role in driving investments towards more sustainable technologies and businesses, finance growth in a sustainable manner over the long-term and contributing to the creation of a low-carbon, climate resilient and circular economy.

From the built environment point of view this is very timely. According to the most recent Global Status Report, annually published by the UN-led Global Alliance for Buildings and Construction of which we are a founding member, the rate of energy efficiency investment in buildings as a share of total investment when compared to previous growth rates is slowing down: while total investment in building construction and renovations is rapidly growing, the report highlights an emerging gap between total energy efficiency spending.

What is the Taxonomy and why do we need it?

One of the measures within the Sustainable Finance package was a proposal for a unified classification system, or Taxonomy, on what can be considered an environmentally sustainable economic activity.

First and foremost, the objective of the Taxonomy is to help translate commitments to the Paris Agreement and the UN Sustainable Development Goals for investors. Investors need to understand which companies are contributing to the low-carbon transition and which are building resilience to climate change, not just carbon footprints. This will help avoid reputational risks and ensure future-proof investments.

What was our involvement in the TEG?

We were selected to work as one of the 35 TEG expert members in July 2018 from a strong field of applicants as the only organisation from the built environment sector in recognition of our extensive body of work on sustainability both at EU and at UN levels. Other members of the building sector group include representatives from the European Investment Bank, the Climate Bonds Initiative, the EU’s Joint Research Council and the European Commission.

What does the Taxonomy mean for the buildings sector?

The TEG has extensively screened activities across a wide range of sectors, including real estate. It has identified low-carbon activities like construction of new energy and resource efficient buildings but also transition activities, such as major renovation, as well as enabling activities, including the installation of new boilers, windows, renewable energy technology, provision of relevant professional services, etc. Covering 67 economic activities in a wide range of sectors, the Taxonomy represents the most comprehensive classification system for sustainable activities to date.

The Taxonomy covers virtually all buildings and renovations and represents a major milestone for our sector. Effectively, what we have been able to contribute to is the creation of a common language around sustainable buildings, tackling the question that many people have been grappling with for years: What is a sustainable building?

This is a first and important step in the efforts to channel investments into sustainable buildings and having a clearly defined set of criteria for sustainability characteristics will also help many professionals such as facility managers, valuers and brokers to consider these in their daily work and during conversations with investors and financing institutions.

Referencing International Property Measurement Standards

The Taxonomy metrics for buildings are based on annual operational primary energy demand (and in the future also on operational greenhouse gas (GHG) emissions) per m2 floor area. It is a well-known fact that building floor measurement varies quite substantially across countries. It is probably a lesser known fact that not clearly defining and disclosing what is included in the floor area and what is not can also distort benchmarking and reporting in relation to building energy performance levels in different countries and regions. What is needed is consistency regarding metrics within and between markets, and throughout the entire lifecycle of assets which is why the Taxonomy criteria for the Buildings Sector reference the International Property Measurement Standards (IPMS) as the standard for floor measurement for construction of new buildings, renovation of existing buildings and building acquisition.

What is next for the Taxonomy?

Following the publication of the Taxonomy Report by the European Commission on 18 June 2019 and the presentation to the wider public at a Stakeholder Dialogue Conference on 24 June in Brussels, the Commission is launching a call for feedback on the user guide and the technical report.  

With the mandate of the TEG having been extended until the end of 2019, we will continue to be involved in this important EU initiative, advising the Commission on how to take this feedback on board and providing further guidance to the Commission on the usability and implementation of the Taxonomy by market participants.