Green Taxonomy: challenges and outlook

What is the European Green Taxonomy?

The Green Taxonomy is an EU-wide classification system that serves as a guide to channel investment towards more sustainable and environmentally-friendly activities. It provides a detailed framework for identifying economic activities that can make a significant contribution to one of its six major environmental objectives.

One of the key aims of the Green Taxonomy is to provide a standard definition of what constitutes a sustainable economic activity. This helps investors, companies and stakeholders to focus on projects that are truly ecological and avoid “greenwashing”. Thus, in the long term it must establish a common language for sustainable finance and enable transparent comparisons of sustainable investments across Europe.

The core requirement of the European Green Taxonomy is that the companies concerned must disclose what proportion of their revenue, 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. The activity must also meet certain minimum social and ethical standards to be considered aligned with the objectives.

The Green Taxonomy is based on six major environmental objectives to guide activities and investments:

• Climate change mitigation: this target focuses on reducing greenhouse gas emissions and increasing carbon absorption. Activities contributing to this objective include the development of renewable energies, energy efficiency, and carbon storage.
• Climate change adaptation: this involves encouraging investments that increase resilience to the impacts of climate change, such as improving the resilience of infrastructure to extreme climate events.
• Sustainable use and protection of water and marine resources: this aims to preserve water quality and availability, promote its efficient use and protect marine ecosystems.
• Transition to a circular economy: this includes activities that reduce the generation of waste, encourage recycling and resource efficiency, as well as the design of sustainable products.
• Pollution prevention and control: this involves measures to reduce emissions into the air, water and soil, and to manage hazardous chemicals.
• Protection and restoration of biodiversity and ecosystems: this objective supports activities that preserve natural habitats, restore degraded ecosystems and promote the conservation of species.

The real estate sector is amply covered by the taxonomy with several activities that can contribute significantly to one of these objectives. In particular:

• Under the climate change mitigation target:
  • The acquisition and holding of real estate assets: for Covivio, this corresponds to the real estate leasing activity
  • Renovation of existing buildings
  • Building construction
  • Projects to improve energy efficiency in the portfolio

• In respect of the circular economy objective:
  • Building construction
  • Demolition

Covivio is also affected by the biodiversity target for its hotel operating activity.

Covivio’s approach to the Green Taxonomy

Covivio, as a major player in European real estate, has taken a proactive approach to alignment with the Green Taxonomy criteria. This approach is in line with its long-term strategy of embracing sustainable development and in particular its commitment to the climate.

Covivio’s investment decision-making process takes into account strict environmental criteria, in accordance with the Green Taxonomy. The Group favours real estate projects that are not only efficient and sustainable, but also limit urban sprawl. Covivio strives to create innovative mixed-use projects by concentrating its portfolio on major European cities.

For several years now, its development projects have had various types of environmental certification, giving Covivio a solid foundation for its development Capex to achieve a high rate of alignment with the taxonomy.

Given its diversified activity (by country and product), taxonomy reporting required the Group to carry out precise analysis at the level of each business activity while still ensuring overall consistency. The methodology will evolve further in the future. However, the regulation has highlighted significant disparities in environmental regulations across Europe, such as in the Energy Performance Certificate (EPC).

In line with its carbon trajectory, Covivio has estimated the energy efficiency investments necessary to achieve its climate objectives at €254 million (Group Share). This Capex mainly corresponds to taxonomy activity 7.3 – Installation, maintenance and repair of energy efficiency equipment. These investments have a direct impact on the energy performance of assets and make it possible to counter obsolescence and increase their attractiveness while limiting expenses for tenants.

Financial implications of the taxonomy

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

The Covivio Hotels Framework, published in 2023, was one of the first to consider a complete alignment with the taxonomy: not only the substantial contribution criterion, but also that of DNSH – Do no significant harm – and minimum guarantees. Other criteria applied included: environmental certification rated Excellent or better or alignment with a CRREM* 1.5 °C trajectory.

At the end of 2023, Covivio had an eligible Green Bond portfolio of €6 billion and Covivio Hotels one of €3.9 billion, of which €5.9 billion was taxonomy-aligned, making it possible to cover 100% of the bonds.

What future for the taxonomy at Covivio?

Given the still evolving methodology, it is too soon to comment confidently on alignment objectives. Covivio will continue to grow its portfolio thanks to green Capex and developments.

The taxonomy is a tool and a key indicator, which paves the way for implementation of the NFRD (Non-Financial Reporting Directive) which will apply to Covivio from 2025.

The hotel business will come into the taxonomy’s scope under the biodiversity objective and this will require a new reporting process, which we have already started to analyse.

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* Carbon Risk Real Estate Monitor – CRREM Project