Lisa Chase: The “Fit for 55” Convergence of Energy Efficiency and Corporate Reporting Rules

Upcoming revisions to the Energy Performance of Buildings Directive (EPBD) were a popular topic at the C4E conference. It seems likely that the EPBD will increase building energy performance requirements and potentially introduce energy reporting mandates to strengthen the Energy Performance Certificate system. Correlating EPBD compliance to measurable energy efficiency improvements will be critical to meeting the European Climate Law’s “Fit for 55” goal of reducing greenhouse gases 55 percent by 2030. New corporate and financial reporting rules will be powerful complementary tools to increase the EPBD’s effectiveness in achieving the Climate Law’s targets.

Recent research at King’s College London shows that the portfolio of corporate accountability rules, which will effectively mandate Environmental, Social and Governance (ESG) reporting, are important motivators for energy efficiency measurement and reporting. The research reveals that real estate companies are already assessing and reporting energy use in anticipation of the corporate disclosure requirements, underscoring how these policies can improve the EPBD’s effectiveness. It also illustrates the opportunities for CEE projects, particularly renovations of inefficient post-war structures, to develop technical expertise and attract financing.

Corporate and Financial Disclosure Rules

The Sustainable Finance Disclosure Regulation (SFDR), implemented in March 2021, obligates all financial advisers, large entities (over 500 employees) that manage financial funds, and financial products with a sustainable investment objective to disclose sustainability risks and impacts. It applies to asset managers raising money in the EU, regardless of where they are based, and investment managers outside of the EU who market their products to EU clients. The SFDR requires product level reporting on how investments inside and outside of the EU may be negatively impacting the environment, such as by polluting water, damaging biodiversity or contributing to global climate change. This means that real estate projects in EU candidate states, financed by EU investors, would be required to assess and report energy and environmental impacts to the investment firm.

Investors will likely be evaluating projects for their ability to report on environmental impacts. Developers in the CEE region, including EU candidate states, can attract financing by demonstrating that their projects can comply with SFDR requirements. Western Balkans projects, for example, can secure regionally dedicated EU funding of 9 billion euro in grants and 20 billion euro in loans. Because much of this funding will flow through local banks, CEE financial institutions that are already evaluating environmental factors can help projects adopt the technical skills for SFDR compliance.

The Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence (Due Diligence Directive) is scheduled for a December release. It would require companies to develop and publicly communicate a strategy for good governance and for preventing potential negative human rights and environmental impacts throughout their supply chains. The Due Diligence Directive would apply to any business operating or selling in the EU with more than 250 employees, more than 50 million euro in annual revenues or a balance larger than 43 million euro. It would also apply to publicly listed companies and some small and medium sized enterprises (less than 250 employees). Certain C4E Forum attendees, including building material producers, could be required to collect and report environmental impact data from their worldwide supply chains. Penalties for non-compliance could include large fines, exclusion from public procurement or state aid, and EU import bans.

The proposed Corporate Sustainability Reporting Directive (CSRD) will amend the Directive on Non-Financial Reporting (NFRD), which requires publicly listed large corporations (over 500 employees) operating in the EU to report on their environmental and social impacts. The CSRD would extend the NFRD scope to companies with at least 250 employees and a balance sheet of 20 million euro and/or 40 million in annual revenues. Beginning in fiscal year 2023, the CSRD would require detailed audited reporting, such as the energy use of buildings managed by a real estate company. Nearly 50 thousand EU companies would be subject to the CSRD, compared to 11 thousand required to comply with the NFRD, including CEE companies not subject to the Due Diligence Directive.

In July 2022 the European Commission is scheduled to release the Taxonomy Regulation, which will provide definitions for companies and investors to measure and report their environmental impacts. The Taxonomy will apply directly to the SFDR and could potentially be applied to the CSRD and Due Diligence Directive.

Summary

Prior to the SFDR implementation, a survey of architects, real estate owners, developers, managers and investors in all 27 EU States and the UK found that 60 percent of respondents measured energy performance for the buildings under their ownership or management. These organisations were not required to assess building energy use, but indicated that they measured and reported energy performance because their investors required it or because they anticipated being subject to the SFDR or the Due Diligence Directive.

Significantly, some investors reported mandating energy performance reporting for their real estate projects in the CEE region, including EU candidate states. While the research isn’t representative of the entire European real estate and construction industries, it clearly indicates why the portfolio of new corporate disclosure rules are a potential game-changer for improving building energy performance. These trends represent opportunities for the CEE region, and the entire EU real estate sector, to meet the “Fit for 55” challenge.

About the author:

Lisa A. Chase has researched and written extensively on sustainable design and development for Harvard Graduate School of Design, Harvard University’s Real Estate Academic Initiative and Harvard Business School. She has co-authored publications on social entrepreneurship and corporate social responsibility in Stanford Social Innovation Review, Harvard Business Review and Harvard Business School Working Knowledge. Lisa has presented to academic and industry audiences, including Yale University, Fordham University and the C4E Forum, on design strategies and financing mechanisms for environmental and social welfare solutions. She is a Master of Laws candidate in European Union Law at King’s College London, researching the effectiveness of European Union energy efficiency requirements for buildings. Lisa‘s consultancy, Lucky Fish Communications, specializes in policy research and content development for urban design and the built environment.