Development is facing radical changes in the area of ESG. Buildings can't do without solar panels

MEPs in mid-March supported a plan to achieve a climate-neutral buildings sector by 2050. The European Parliament voted its position on the revision of the Energy Performance of Buildings Directive, which will radically transform the entire construction and development industry. What changes are in store for the buildings sector and when? And how will sustainability requirements be written into the business of developers or real estate funds? Here is a summary of the highlights.

Construction is one of the key sectors for the low-carbon transformation of the European economy. Buildings are responsible for 40% of energy consumption and 36% of energy-related greenhouse gas emissions in the EU. At the same time, almost three quarters of existing buildings are energy inefficient and require extensive renovation. Yet only about one percent of the EU building stock is renovated each year. In the Czech Republic, according to a recent CEEC Research survey, sustainable construction is in the minority. The survey found that only 25% of Czech construction companies have goals for sustainable construction.

EPBD on buildings: renewable energy and mandatory renovation

As part of its 2050 carbon neutrality target, the EU is working to decarbonise the buildings sector. Currently, all new buildings must meet the standard for near-zero emission buildings. However, the EU is already finalising an amendment to the Energy Performance of Buildings Directive that will require only so-called zero emission buildings ("ZEBs") to be built. The long-term vision is a fully decarbonised building stock by 2050.

Zero-emission buildings will become the new standard, which, according to the European Commission's proposal, should be gradually applied to new public (from 2027) and other new (from 2030) and existing (by 2050) buildings. These are to be very low-energy buildings that do not produce carbon emissions from fossil fuels on site. The very low energy consumption of the ZEB is likely to be able to be met in some of the ways we outline in the graphic.

However, the final requirements for the ZEB will be known once a final compromise has been negotiated between the European Commission, the European Parliament and the EU Council. Negotiations will start in the coming days, and agreement on the final form of the Directive can be expected in the summer months.

EPBD also sets minimum energy performance requirements for existing non-residential and residential buildings with the aim of renovating the worst performing buildings.

In addition, the EU's RePower strategy, issued last year, foresees the mandatory installation of rooftop solar on all new public and non-residential buildings (with a useful floor area greater than 250 m2) from 2026 and on all new residential buildings from 2029. 

Development: compliance with EU taxonomy and data collection is key

It is essential for developers to align their projects as closely as possible with the EU Taxonomy criteria so that they do not have difficulties with financing and at the same time can access soft loans for green projects. At the Bold Future conference, representatives of the largest banks confirmed that they are ready to support green projects with more favourable financing, supported by appropriate data. They also agreed that taxonomy should be one of the key drivers for green loan applicants.

"We know from our experience that developers have to think on a long-term scale, their projects usually last almost a decade. Therefore, developers relying on bank financing are very sensitive to ESG changes, take them seriously and prepare themselves," comments Pavel Franc, CEO of Frank Bold.

In addition to bank financing, compliance with the taxonomy will also be necessary for the issuance of green bonds under the European standard (EU GBS). In both cases, the ability of developers to collect and report the necessary ESG data will be critical.

To simplify the process of obtaining the necessary information for banks, the Czech Banking Association's model questionnaire has already been introduced and banks are now working on putting it into practice. 

Customers are also pushing developers to implement ESG. For example, for office space, clients are demanding LEED and BREEAM certifications from developers, which have relatively little intersection with the taxonomy criteria so far.

Investors: transition to light and dark green funds

Real estate funds have to publish how they take into account sustainability factors under the SFDR as from 2022. Those that want to secure a competitive advantage and at the same time a larger flow of investment are seeking to align their portfolios with the conditions for light or dark green investments.

Dark green funds must pursue a sustainable investment objective and report on the proportion of investments that comply with the EU taxonomy. A fund can only comply with the taxonomy if it owns PENB Class A buildings or properties with an energy performance 10% lower than near-zero energy buildings, or if it invests significantly in reducing energy consumption (e.g. use of RES, insulation, technical equipment). Light green funds must pursue environmental or social performance and report on the extent to which they comply in the annual report.

In addition, real estate funds will now be required to disclose information on Principal Adverse Impacts (PIAs). Companies must disclose information on adverse impacts on sustainability factors by 30 June 2023, for the full year 2022.

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