Netherlands reprimanded for failure to implement CSRD on time
On September 26, the European Commission launched infringement proceedings against the Netherlands and 16 other member states for failing...
top of page
Compliance = Value Creation
Practical ESG policy in accordance
CSRD, SFDR & Taxonomy
Which ESG legislation applies to you? CSRD, SFDR or Taxonomy? Doour free test and receive our completely non-binding advice by email.
Overview of training courses and free webinars on ESG strategy and legislation:view our
ESG Academy Series
SFDR |CSRD |Taxonomy | CSDDD
| Benchmark order
Read below briefly & clear about the most important
European ESG legislation
Taxonomie
CSRD
4 tinten lichtgroen
SFDR
Taxonomy
The Taxonomy (actually the Taxonomy Regulation or TR) specifies when a product or service may call itself 'ecologically sustainable'. It is a classification system to which other European sustainability legislation is linked, such as the CSRD and the SFDR. The criteria and standards that must be met have been determined for each economic sector, for example also for real estate.
The Taxonomy looks at how a company's activities interact with six environmental objectives:
(1) prevent climate change (mitigation);
(2) adapt to climate change (adaptation);
(3) Water management and consumption;
(4) Transition to a circular economy;
(5) Pollution: Prevention and control;
(6) Protection and restoration of biodiversity and ecosystems.
A company may only call its product or service 'environmentally sustainable' if the activities in the production process:
(a) contribute substantially to one or more of the six environmental objectives;
(b) do not seriously undermine all other environmental objectives;
(c) comply with established minimum social guarantees (respect human rights);
(d) meet the technical screening criteria (standards).
The technical screening criteria are the standards that must be met, we give some examples of these that are related to the real estate sector. The Taxonomy has elaborated the criteria and standards for four (economic) activities, namely:
(i) the "construction of new buildings",
(ii) “refurbishment of existing buildings”,
(iii) "installation and management of energy-related infrastructure" (we will not consider this further);
(iv) the “purchase and ownership of buildings”.
In the examples below, companies choose to make their buildings more sustainable and follow the Taxonomy. This choice was prompted by the positive impact on value development and financing options. In practice, people often choose to 'contribute substantially (a)' to climate objective 1: preventing climate change. Different standards have been developed for the four (economic) activities within real estate:
(i) For new construction, the energy demand must be at least ten percent below the standard for energy-efficient buildings (NZEB standard).
(ii) For the renovation of existing buildings, a reduction of at least 30 percent of the primary energy demand must be achieved. In the event of a major renovation, the requirements regarding the energy performance of buildings must be met.
(iv) In the case of 'purchase and ownership of buildings', buildings (with building permit) from before 2021 must have at least energy label A. BENG-10 applies to younger buildings.
For the other objectives, the minimum standard must be met (Do No Significant Harm).
Please contact us if you have any questions about Taxonomy alignment, Taxonomy reporting or sustainable Due Diligence. We're happy to help. Did you read our webinar on Taxonomy, BREEAM & Missed GRESB? You canhere a linkto request. You can also look at ourESG Academy.
Corporate Sustainability Reporting Directive (CSRD)
The CSRD is European legislation that obliges all large and medium-sized companies to report transparently and uniformly on their own sustainability. A very extensive guideline has been drawn up for this, namely the ESRS (European Sustainability Reporting Standard). This ESRS is structured according to ESG topics: Environment, Social, Governance. For all subjects, companies must assess how important they are (how 'material') for their own business operations (outside-in) or for the external stakeholders (inside-out). Although this is quite an exercise because it involves a large collection of subjects, a pragmatic approach is possible. Subsequently, companies are obliged to report on the topics that are 'material' in accordance with the guidelines in the ESRS.
In our opinion, the chosen ESG structure is enlightening, future-proof and also gives direction to who in the organization is responsible for providing the requested information. Incidentally, the entire CSRD process has been included by Boot Advocaten in Stainable CSRD. This software tool takes you step by step through the CSRD compliance process, including the Due Diligence, the Double Materiality Assessment and of course CSRD Reporting.
When and for whom is the CSRD important?
From the 2024 financial year, the CSRD applies to companies that already have to report on the basis of the NFRD (companies with 500+ FTE or social relevance). This will be followed from the financial year 2025 by the large companies (2 of the 3: 250+ FTE, balance sheet total 20M+, net turnover 40M+) and from the financial year 2026 the listed medium and small companies. In total, approximately 50,000+ companies in the European Union will have to include sustainability information in the management report on the basis of the CSRD. In addition, the sustainability report must be machine readable and published in the European Single Access Point (ESAP), which is expected to be operational in 2024. Unlisted small and medium-sized enterprises (SMEs) are not in scope, but will have to provide data from the supply chain of a company subject to CSRD. We advise you to start with the first steps as soon as possible: the Due Diligence and the Materiality Assessment. These not only have legal value, but in our opinion have a potential positive impact on the (labour) market value of your company.
Please contact us if you have any questions about CSRD Readiness, CSRD Due Diligence, CSRD Dual Materiality Assessment or CSRD implementation. You can also use ourESG Academy view, or participate in our webinars.
Sustainable Finance Disclosure Regulation (SFDR)
The SFDR is European legislation that obliges financial markets to report transparently and uniformly on the sustainability of their investments, namely per investment product and at entity level. Investments must 'show their colours': are they dark green (sustainability objective) or grey? The SFDR makes a distinction between an Art. 6 (grey), art. 8 (light green) and an Art. 9 (dark green) product. A frequently asked question is 'how do I get from gray to light green?'. A claim that is too green is attractive to the market ('greenwashing'), but the risk of fines and reprimands is high. However, it is not necessary to keep all funds gray ('greenhushing') in order to avoid any risk.
Funds can often directly justify a light green claim: this yields an immediate market advantage and can be done over four routes. We call this thefour shades of light green. This product strategy can, for example, help residential and office investors in buying and selling. For example, added value can be created by purchasing a property, which is part of a financial product, 'grey' and then making it more sustainable.
When and for whom is the SFDR important?
The SFDR is an obligation for financial market participants with a financial product and financial advisors with three or more employees. Financial market participants include credit institutions, investment firms, asset managers, alternative investment fund managers (AIFs, including AIF-light managers), pension funds and life insurers. A financial product includes pension schemes, insurance and investment funds. The SFDR, which became applicable on March 10, 2021, imposes reporting obligations at both entity and product levels. These reporting obligations are detailed in the Regulatory Technical Standards, which became applicable from 1 January 2023.
Four shades of light green
The first category is the promotion of ecological and/or social characteristics. This is such a broad definition that almost everything related to sustainability fits into it. The lack of threshold values can lead to a difference between investor expectations and the degree of sustainability of such a product, which can actually encourage greenwashing. However, the characteristics promoted must be reflected in the investment policy and the companies invested in must follow good governance practices.
The second category refers to a product that, in addition to promoting ecological and/or social characteristics, also makes sustainable investments. Such a product is 'greener' than a fund that only promotes sustainability features. The second category is divided into three subcategories:
-
Sustainable investments with an environmental objective that are Taxonomy aligned. This requires compliance with a tight and demanding definition from the Taxonomy Regulation. See more about this in section 1.3.
-
Sustainable investments with an environmental objective aligned with the SFDR. An investment must not seriously undermine other environmental or social objectives and the investee company must follow good governance practices. 'Do not seriously harm' is further defined on the basis of the PAI indicators, but due to the lack of a well-defined lower limit, the definition of the SFDR is broader than that of the Taxonomy Regulation.
-
Sustainable investments with a social objective aligned with the SFDR. Promoting social sustainability already makes a product light green. Although a Social Taxonomy is in the works, few social sustainability frameworks are currently available. With their housing fund, Bouwinvest promotes liveable, affordable, suitable and inclusive housing for the target group for whom they build. Other options include combating loneliness in residential areas or promoting integration through community centers or gyms.
Contact
bottom of page