Green taxonomy: definition, challenges and outlook

What is the European green taxonomy?

The green taxonomy is a classification system developed at European Union level to serve as a guide for directing investment towards more sustainable and environmentally friendly activities. It provides a detailed framework for identifying economic activities that can contribute significantly to one of the six major environmental objectives that comprise it.

One of the main objectives of the green taxonomy is to provide a uniform definition of what constitutes a sustainable economic activity. This helps investors, businesses and stakeholders to focus on genuinely green projects and avoid greenwashing. Ultimately, it should establish a common language for sustainable finance and enable transparent comparison of sustainable investments across Europe (what is the green taxonomy?).

To meet the main requirement of the European green taxonomy, the companies concerned must declare what proportion of their turnover, investments (CAPEX) and operating expenses (OPEX) corresponds to activities deemed sustainable. An activity is considered sustainable if it contributes significantly to one of the six defined environmental objectives without harming the others. In addition, these activities must meet certain minimum social and ethical standards to be considered aligned with these objectives. This taxonomy regulation (the green taxonomy regulation adopted by the European Commission) provides for gradual entry into force and application, with technical thresholds per activity.

The green taxonomy is based on six major environmental objectives to guide activities and investments:

• Climate change mitigation: reducing greenhouse gas emissions and increasing carbon absorption. Activities include the development of renewable energies, energy efficiency and carbon storage.
• Climate change adaptation: encouraging investments that increase resilience to the impacts of climate change, such as improving the resistance of infrastructure to extreme weather events.
• Sustainable use and protection of water and marine resources: preserving water quality and availability, promoting efficient water use, and protecting aquatic and marine resources.
• Transition to a circular economy: reducing waste production, encouraging recycling and efficient use of resources, and designing sustainable products.
• Prevention and reduction of pollution: reducing emissions to air, water and soil, and managing hazardous chemicals.
• Protection and restoration of biodiversity and ecosystems: preserving natural habitats, restoring degraded ecosystems and promoting species conservation.

The debate surrounding the inclusion of gas and nuclear power in the European green taxonomy illustrates the complexity of defining what actually constitutes a sustainable activity; these topics, which have been widely discussed by experts, remain subject to strict criteria.

The real estate sector is well covered by the taxonomy, with a list of eligible activities that can contribute significantly to one of these objectives. In particular:

Under the climate change mitigation objective:

• The acquisition and holding of real estate assets: for Covivio, this corresponds to the activity of leasing real estate assets
• The renovation of existing buildings
• The construction of buildings
• Energy efficiency measures implemented across the portfolio

Under the circular economy objective:

• The construction of buildings
• Deconstruction

Covivio is also concerned by the biodiversity objective for its hotel operations.

Covivio’s approach to green taxonomy

As a major player in European real estate, Covivio is taking a proactive approach to aligning itself with green taxonomy criteria. This approach is in line with its long-term strategy for sustainable development and, in particular, its climate commitment (neutrality and reduction of emissions).

In its investment decision-making process, Covivio takes into account strict environmental criteria, in accordance with the European taxonomy. The group favours real estate projects that are not only efficient and sustainable, but also limit urban sprawl. Covivio thus strives to create mixed-use and innovative projects, concentrating its assets in major European cities.

The various environmental certifications obtained for its development projects over several years enable Covivio to build on solid fundamentals to ensure a high level of alignment with the taxonomy for its development CAPEX.

Given its diversified activity (countries and products), taxonomy reporting required the implementation of a precise analysis at the level of each activity, while ensuring overall consistency. The methodology is still likely to evolve; nevertheless, this regulation has highlighted significant differences at European level in environmental regulations, such as the Energy Performance Certificate (EPC). In this context, the green taxonomy is not just a compliance requirement: it structures investment management and the transition to a more resilient real estate economy.

In line with its carbon trajectory, Covivio has estimated that €254 million (Group share) in energy efficiency investments will be needed to achieve its climate objectives. These CAPEX investments mainly correspond to activity 7.3 – Installation, maintenance and repair of energy efficiency equipment in the taxonomy. These investments have a direct impact on the energy performance of assets and help to combat obsolescence and increase their attractiveness, while limiting costs for tenants.
At the same time, Covivio is closely monitoring the progress of the social taxonomy, which is set to complement the environmental component.

Financial implications of the taxonomy

In line with the Group’s debt greening strategy, Covivio has incorporated the taxonomy criteria into its financing principles as part of its two Green Bond Frameworks (Covivio and Covivio Hotels).

The Covivio Hotels Framework, published in 2023, was one of the first to consider full alignment with the taxonomy: not only the substantial contribution criterion, but also the DNSH (do no significant harm) criterion and minimum safeguards. Other criteria included environmental certification at a level equal to or higher than Excellent, and alignment with a CRREM 1.5°C* trajectory. This concrete application of green taxonomy regulations reinforces the credibility of green bonds and meets the expectations of sustainable finance investors.

At the end of 2023, Covivio had a Green Bond-eligible portfolio of €6 billion and Covivio Hotels had €3.9 billion, of which €5.9 billion was aligned with the taxonomy, thus covering 100% of bonds. These figures illustrate the operational application of the European taxonomy in support of green taxonomy objectives.

What does the future hold for taxonomy at Covivio?

With the methodology still evolving, it is too early to comment on alignment objectives. Covivio will continue to develop its assets through green CAPEX and developments.

Furthermore, taxonomy is a tool and a key to understanding, which prepares for the implementation of the CSRD (Non-Financial Reporting Directive) (green taxonomy and CSRD) that will be applicable to Covivio from 2025.

The inclusion of the hotel business within the scope of the taxonomy under the biodiversity objective will require new reporting, which we have already begun to analyse. Future adjustments will depend on the guidelines issued by the European Commission (European Commission Green Taxonomy) and the entry into force of any new technical thresholds.

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* Carbon Risk Real Estate Monitor – CRREM Project