EU taxonomy – set of rules for sustainable classification and the relevance for the health and social economy

Since the beginning of this year, the EU Taxonomy Regulation has been a key component of the EU’s Green Deal. The regulation was adopted by the European Commission in 2020. It is part of the “Action Plan for Financing Sustainable Growth” presented by the EU Commission in March 2018. This is intended to direct capital flows into environmentally sustainable economic activities.

The taxonomy is intended to drive the reduction of environmentally harmful greenhouse gases: In order to achieve a significant reduction in CO2 emissions, a climate-friendly transformation of all economic sectors is necessary – more private investments are to be directed towards this endeavor. This will make sustainability a criterion for risk management in the financial sector.

The EU taxonomy has caused extensive and intensive discussions so far. One point of contention is the plans to classify nuclear and gas energy as sustainable. Critics see this as a bitter setback for climate protection – various EU countries have different opinions. And many companies are asking themselves: Are we also affected by the EU taxonomy and what does it mean for us? What is obligatory for whom and when? How can I prepare for it? What do I need for this?

What is the EU Taxonomy?

With the “ecological” taxonomy regulation (taxonomy for short), the European Commission intends to define which economic activities will be classified as ecologically sustainable in the future. This is intended to create the basis for directing capital into sustainable investments, i.e. into these economic activities classified as ecologically sustainable.

In principle, an economic activity is to be classified as ecologically sustainable within the purpose of the Taxonomy Regulation if it meets four criteria:

1. The activity makes a significant contribution to at least one of six environmental objectives.
2. The activity does not lead to a significant impairment of an environmental objective.
3. The business activity also complies with certain minimum social standards. These include the United Nations Guiding Principles on Business and Human Rights or the International Bill of Human Rights.
4. The activity complies with defined technical assessment criteria. These can be used to assess whether the activity contributes significantly to an environmental objective or significantly impairs an environmental objective.

6 Environmental targets according to EU taxonomy

• Climate change mitigation,
• adaptation to climate change,
• the sustainable use and protection of water and marine resources,
• the transition to a circular economy,
• the prevention and reduction of environmental pollution, and
• the protection and restoration of biodiversity and ecosystems.

The taxonomy in its entirety is composed on the one hand of the Taxonomy Regulation and on the other hand of further delegated regulations. For the two environmental objectives “climate protection” and “adaptation to climate change”, the technical assessment criteria for certain economic activities have been available since December 2021. Further legal acts on the other environmental objectives are to follow this year.

Relevance of the taxonomy for the health and social economy

The taxonomy provides a new direction for banks and their customers, the companies with financing needs, because the criteria set out in the taxonomy are now anchored in European law and also form the basis for other areas, such as sustainable financial products, reporting or new supervisory regulations for the financial industry. Due to this orientation towards the financial and capital markets, companies in the healthcare and social economy are indirectly affected.

The technical assessment criteria in particular represent a “milestone” on the way to transferring the Taxonomy Regulation into practice. For this reason, they will be examined in more detail below:

The technical assessment criteria for the two environmental goals “climate protection” and “adaptation to climate change” only include those economic activities that can make a significant contribution to achieving the European climate goals. This includes, among others, the sector “Construction and Real Estate”, because according to the European Commission, 40% of energy consumption and 36% of CO2 emissions within the European Union are attributable to buildings.

The technical evaluation criteria are available for all economic activities related to the construction and real estate sector, which relate to new construction, renovation of existing buildings, installation, maintenance and repair of energy-efficient equipment, charging stations for electric vehicles in buildings or renewable energy technologies, as well as the acquisition and ownership of buildings. They can be used to verify whether they are considered “environmentally sustainable” and thus “taxonomy compliant.”

1. Climate protection: energy efficiency and use of materials

Buildings – for example, care facilities, hospitals or even daycare centers – play a central role in the healthcare and social economy, as most companies also own the real estate they use and thus have to deal with the maintenance, renovation or acquisition of additional buildings.

The technical assessment criteria used to determine whether an economic activity, for example in the area of new construction, makes a significant contribution to climate protection and also does not significantly compromise any environmental goal are clearly outlined. These involve thresholds to be achieved in primary energy demand and its verification, or the identification of physical climate risks that are material to the activity. Such hazards may include heat or cold waves, forest and wildfires, or heavy precipitation. Provided the multitude of defined criteria are met in aggregate, the economic activity can be classified as environmentally sustainable (for the environmental goal of “climate change mitigation”).

2. Adaptation to climate change: preparation for new climate hazards

The technical assessment criteria for a new building to determine whether an economic activity makes a significant contribution to climate change adaptation include whether the activity implements solutions that significantly reduce significant physical climate risks. Companies in the healthcare and social services sectors in particular need to focus more on such risks and prepare for potential extreme weather events, as the well-being and protection of patients and staff is paramount.

In addition, it must be determined whether the economic activity does not lead to any significant impairment of an environmental objective. Technical evaluation criteria are also provided for this purpose, such as thresholds for maximum primary energy demand.

3. Significance of taxonomy-compliant economic activities

As mentioned above, the classification of whether economic activities are taxonomy-compliant will play a stronger role in the future in the transparency obligations for large companies as well as for banks. Further regulatory and supervisory requirements, which are still being prepared, also suggest that classification in line with the taxonomy will also have an impact on capital adequacy or risk assessment in financing.

Outlook

In the course of the year, further technical assessment criteria for the remaining four environmental targets will be published, which could result in additional aspects for the buildings sector. The European Commission will regularly review the evaluation criteria of the Taxonomy Regulation and adapt them if necessary. All stakeholders involved should keep an eye on the changes.

Transparency in non-financial statements

Insofar as a company from the health and social economy is obliged to submit a non-financial statement, new transparency requirements in the purpose of the Taxonomy Regulation must also be fulfilled in the future.

Tasks for companies in the health and social economy

• Examination of whether an energetic refurbishment / renovation of existing buildings is necessary and possible.
• If necessary, derivation of potential measures that could be implemented in the short, medium and long term.
• Examination of the contents of the taxonomy, i.e. its criteria in general and, in particular, the comprehensive technical assessment criteria for buildings, e.g.:
• Statement of energy performance via the Energy Performance Certificate.
• Examination of the product data sheets of certain sanitary appliances with regard to, among other things, water flow
• Analysis of site-related physical risks
• Derivation of measures to mitigate the risks or to prepare in dealing with unavoidable risks.
• Companies that are required to submit a non-financial statement: Analysis of the data to be collected in the purpose of the Taxonomy Regulation.

Author: Dr. Astrid Herrmann, Head of CSR and Sustainable Finance, Evangelische Bank

Evangelische Bank eG

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