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March 29, 2023

On the Road to Climate-Neutral Buildings: Background, Regulations and Success Factors

The Building Sector as a Central Pillar of an Emission-Free Future

The importance of sustainability in the real estate industry has grown significantly in recent years due to global challenges like climate change and the increasing necessity to preserve resources. These factors are compelling the industry to transition towards sustainable practices. The substantial environmental impact of the building sector places not only a moral obligation to take action but also faces mounting pressure from social and regulatory forces.

EPBD and GEG: Pioneering Measures for Achieving EU Climate Goals

To fulfill the commitments of the UN Agenda 2030 and the Paris Agreement, the European Union has established ambitious objectives within the so called "European Green Deal". These goals include reducing emissions by a minimum of 55% by 2030 and to become the first climate-neutral continent by 2050. The European Climate Law has transformed these targets into legal obligations, making their realization mandatory. The building sector is considered as a pivotal player in attaining these objectives. According to the Climate Law, all newly constructed properties must be CO2 neutral by 2030 to align with the climate targets. This requirement will be extended to encompass the entire stock of existing buildings starting from 2050. In 2021, Germany reinforced its federal Climate Change Act again, advancing the final target of net greenhouse gas neutrality from 2050 to the more ambitious goal of 2045.  

To ensure EU member states' compliance with the European Climate Law, the "Fit for 55" package includes several proposals to revise and update specific EU legislation. One of these is the Energy Performance of Buildings Directive (EPBD), which in turn directly influences the German Buildings Energy Act (GEG). Currently, the EU Parliament, the Council, and the EU Commission are still in the process of negotiating a new version of the EPBD through a trialogue procedure. What is certain, however, is that there will be significant tightening of provisions, especially for existing buildings, based on so-called minimum efficiency standards (MEPS). In this context, the proposal to prioritize renovations for the least energy-efficient 15 percent of buildings in each member state, known as the "worst first" principle, is particularly subject to debate.

The EU Taxonomy Regulation: Sustainability as an Investment Requirement

The Taxonomy Regulation is central to the European Sustainable Finance Action Plan (SFAP) and has already been applied in the relevant sectors since the start of 2022. It defines which economic activities qualify as environmentally sustainable, allowing investors to align their capital investments accordingly. The accompanying Disclosure Regulation (SFDR) mandates that participants of the financial services sector shall report on the sustainability aspects of their investments. While the principles of Environmental, Social, and Governance (ESG) reporting encompass social concerns and responsible corporate governance, the EU taxonomy's current criteria catalogue focuses solely on environmental sustainability aspects, such as a property's energy consumption. The transparency obligations and sustainability standards implementation apply not only to the acquisition and ownership of new buildings but also to the renovation of existing buildings and specific modernization measures. In the meantime, an EU expert group has already proposed an initial guideline for classifying socially sustainable economic activities, which are intended to complement the environmental taxonomy. Relevant for commercial real estate, for instance, could be the requirement to meet specific comfort standards in the building.

The Taxonomy Regulation is currently not binding and does not (yet) stipulate the required number of compliant buildings a fund must include to be considered sustainably managed overall. However, the schedule for implementing national and international regulations is tightly planned, and it's probable that additional innovations will emerge in the years ahead.

Four Reasons for Immediate Action

Whether real estate fund company, project developer, asset or property manager - the entire value chain of the industry is directly or indirectly impacted by the above named developments. The arguments for swift reconsideration are obvious:  

1.     Market Value: Buildings that fail to meet existing sustainability criteria are at risk of devaluing and may become unappealing as stranded assets for potential investors.

2.     Stakeholder Benefits: Financial institutions are promoting sustainable investments by offering more attractive financing terms.

3.     Cost Efficiency: The decarbonization of building operations pays off financially, as operating costs decrease and energy efficiency increases.

4.     Regulatory Compliance: The continuous evolution of legal regulations at both the European and national levels will demand increased action within the real estate sector in the years ahead.

Time to Invest Into the Future now!

✔️ Check the compliance of your assets and plan necessary adjustments.

✔️ Collect and transparently showcase sustainability data.

✔️ Implement measures to effectively reduce the environmental impact of your assets

✔️ Leverage financial incentives through a carefully crafted funding strategy.

Outlook: On the Road to Climate-Neutral Smart Buildings of the Future with Data-Driven Operational Optimization

At aedifion, we believe that data and its analysis are a central element of a climate-neutral building stock. Our expertise in engineering and information technology is aimed at asset managers and asset owners who want to swiftly and easily adapt their portfolio to the energy transition. We assist in the collection of sustainability data and help implement measures to reduce environmental impacts in a taxonomy- and law-compliant manner. With our AI-based cloud platform, energy consumption, CO2 emissions, and operating costs of buildings can be reduced by up to 40%. In doing so, we contribute to sustainable value enhancement, making your real estate future-proof.