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ESG, Sustainability and the EU Taxonomy: A Complete Overview For Real Estate

Recent developments in Dutch and European regulations demonstrate a growing focus on sustainability and corporate social responsibility. This shift stems from the increasing desire of both government bodies and stakeholders to integrate non-financial aspects into mandatory corporate reporting. These reports are crucial for companies seeking to attract investors or funding. As these values increase in relevance, so do the associated regulations. The Environmental, Social, and Governance (ESG) framework provides companies with a structured approach to reporting in these areas. But what exactly does it entail, which rules apply and to whom do they apply?

Deepening of ESG and Sustainability

Stakeholders today judge companies more critically based on sustainability, social commitment and governance values. As ESG values weigh more and more heavily in their decision-making, there is a growing need for reliable and verifiable information. This has led to an increase in regulations that clearly define reporting requirements on Environmental, Social and Governance values. ESG values are defined as follows:

Environmental: This includes an organisation’s environmental impacts, such as climate change, greenhouse gas emissions, biodiversity loss and energy efficiency.
Social (Society): This covers social conditions and influences, such as employee safety, health and the organisation’s impact on stakeholders.
Governance (Governance): This relates to an organisation’s governance and decision-making processes. It includes measures against corruption, privacy and transparency of remuneration, among others.

Despite various reporting standards, there is no universal policy, which makes determining the right format for ESG reporting sometimes challenging. In this article, we focus on a new development within ESG: the Corporate Sustainability Reporting Directive (CSRD).

CSRD: A New Standard for Reporting

The CSRD replaces the current EU directive on reporting non-financial information for a select group of large companies. This directive requires “large companies” to report and verify non-financial performance starting from financial year 2024. The basis for this reporting is the European Sustainability Reporting Standards (ESRS). In essence, the CSRD requires reporting on:

Business model, policy and strategy, including resilience and implementation of sustainability initiatives.
Time-bound sustainability targets.
The role of governance bodies on sustainability.

EU Taxonomy: Sustainability Assessment

The EU Taxonomy is a system that evaluates sustainability for economic activities of companies, such as buying, renting and manufacturing. Large companies and financial institutions must report on this and make this information public. This enables investors to make more conscious choices for truly sustainable funds. The EU Taxonomy covers the full breadth of the economy, including agriculture, energy, and industry, including construction and real estate.

Provisional DNSH criteria property

At least 70% (by weight) of non-hazardous, waste is prepared for reuse and recycling.
Building designs and construction techniques support circularity: in particular, it is demonstrated, how they are designed to be resource-efficient, adaptable, flexible and dismountable to enable reuse and recycling.

Preliminary criteria green buildings

At least 90% (by weight) of non-hazardous, waste is prepared for reuse and recycling (excluding backfilling).
Calculation of GWP emissions of the entire building across all phases.
Support circularity by designing for material efficiency, adaptability, flexibility and detachability. Compliance with this requirement is demonstrated by reporting on Level(s) indicators 2.3 and 2.4 at Level 2.
Of the applied three heaviest categories (by weight), the applied materials have a maximum of primary new raw materials, and thus a minimum percentage of reused or recycled materials (% see next slide).
A digital ’tool’ with the characteristics and materials of the building (~Building Passport)
At least 50% of the original building in m2 GFA retained (applicable to Renovation only).

Entry into force and scope of application

The CSRD came into force on 5 January 2023, and member states have 18 months to implement it. Initially, the CSRD applies to “large companies”, defined as those meeting two of the three criteria: 250 employees or more, annual turnover above €40 million, balance sheet total above €20 million. From 2024, the standards will apply only to large companies with more than 500 employees. From 2025, the standards apply to all large companies. From 2026, they will apply to small and medium-sized companies, as well as listed credit institutions. From 2028, subsidiaries of “third-country” companies will also have to comply with the reporting standards.

Supervision, sanctions and criticism

Currently, no specific sanctions are imposed for non-compliance with the ESRS. Member states are responsible for sanctions. However, violations can lead to reputational damage and loss of investor confidence. Criticism of the CSRD focuses on its broad scope and possible conflicts with international regulations.

Cooperation in the chain

For many properties, we work together with Flynth and Rombou. As accountants, Flynth is the largest ESG consultant for SMEs in the Netherlands. Rombou is the major consultancy arm in construction from Flynth. We provide demonstrable sustainable development according to BREEAM, GPR or BCI.

Benefits and Concluding remarks

Despite the administrative burden, ESG reporting offers attractive benefits. It attracts investors, customers and employees and offers insight into cost savings. Although companies are currently allowed to choose the form of their ESG reporting, they are advised to follow CSRD standards. These will become mandatory for large companies starting in fiscal year 2024. Taking these guidelines seriously is essential given the growing role of ESG in business operations and possible future changes in director liability. At a time when sustainability and responsibility are gaining traction, adhering to ESG guidelines is not only good for the company, but also for the well-being of our planet and society.