The climate transformation of the European economy does not concern only industry or energy. One of the most important sectors covered by climate regulations is the real estate and construction market, which accounts for about 36% of energy-related CO₂ emissions in the European Union. For this reason, the financial sector – banks, investment funds, credit institutions, and institutional investors – has been integrated into the financing of the transition through a regulatory system known as the EU Taxonomy.

The EU Taxonomy is a classification system for economic activities recognized as environmentally sustainable, forming the foundation of the European sustainable finance framework. For the real estate market, this represents a fundamental change in how investments are assessed: construction projects and real estate portfolios must be analyzed for compliance with climate and environmental criteria.

For banks and funds, this introduces a new requirement: proving that financed projects meet the criteria of the EU Taxonomy. In practice, this leads to the emergence of a new category of analytical and reporting processes known as taxonomy real estate compliance.

What the EU Taxonomy is

The EU Taxonomy (EU Taxonomy) is a classification system established by Regulation (EU) 2020/852 of the European Parliament and of the Council, aimed at creating a common definition of economic activities considered environmentally sustainable.

This system forms the foundation of the European sustainable finance strategy, which aims to redirect private capital toward investments supporting the EU’s climate goals.

The taxonomy covers six main environmental objectives:

1. climate change mitigation
2. climate change adaptation
3. sustainable use of water resources
4. circular economy
5. pollution prevention
6. biodiversity protection

For an activity to be recognized as compliant with the EU Taxonomy, it must meet three basic conditions:

1. Make a substantial contribution to at least one environmental objective, e.g., through greenhouse gas emission reduction.
2. Do no significant harm (DNSH) to other environmental objectives.
3. Meet minimum social safeguards, based on, among others, OECD conventions and the International Labour Organization (ILO).

For the real estate market, regulations concerning EU taxonomy buildings are particularly important, defining environmental criteria for construction investments and real estate portfolios financed by the financial sector.

Criteria for buildings

The EU Taxonomy defines several categories of activities related to construction and real estate. The most important include:

• New building construction

New buildings can be recognized as EU Taxonomy-compliant if they meet specified energy efficiency criteria. The key requirement is that the building belongs to the top 15% most energy-efficient buildings in the given country.

Alternatively, compliance can be demonstrated through very low primary energy demand (PED) or nearly zero-energy building (NZEB) standards.

• Building renovation

Modernization of existing buildings must result in at least a 30% reduction in energy use or meet deep renovation energy standards.

• Acquisition and ownership of buildings

For financing existing properties, it is required to show that the building belongs to the most energy-efficient segment of the market and has an appropriate energy class (e.g., EPC A or B).

• Systems modernization

The taxonomy also covers systems such as HVAC, heat pumps, energy recovery systems, and intelligent energy management systems.

Required data

Meeting the EU Taxonomy criteria requires providing specific environmental and technical data. The most important include:

1. Energy data
   • primary energy demand
   • final energy consumption
   • building energy characteristics
   • energy classes
2. Greenhouse gas emissions data

Increasingly, data on life cycle emissions of the building is also required, including operational carbon and embodied carbon. In the context of new climate regulations, the importance of life cycle carbon building regulations analysis is growing.

3. Material data

For new investments, presenting an LCA (Life Cycle Assessment) and Environmental Product Declarations (EPD) may be necessary.

Resource management data

The taxonomy also requires assessing elements such as construction waste management, use of recycled materials, and resource efficiency.

The challenge of data auditability

One of the greatest challenges related to taxonomy reporting construction is the auditability of environmental data. For banks and financial institutions, it is crucial to be able to verify data, confirm methodology, and document sources.

The problem is that environmental analysis data often come from multiple sources, such as:

1. project documentation
2. energy reports
3. manufacturer environmental declarations
4. BIM models
5. LCA analyses

In practice, this means that the data verification process can be complex and costly.

Risks for banks

From the financial sector’s perspective, the lack of reliable environmental data generates significant regulatory and reputational risk. The most important is the risk of greenwashing.

If a financed investment is incorrectly classified as EU Taxonomy-compliant, the bank may be accused of greenwashing.

Regulatory risk

Financial institutions are increasingly subject to strict reporting obligations arising from regulations such as SFDR (Sustainable Finance Disclosure Regulation) and CSRD (Corporate Sustainability Reporting Directive).

Portfolio risk

Banks must report the share of EU Taxonomy-compliant assets in their financial portfolios. This indicator is known as the Green Asset Ratio (GAR). Incorrect classification of investments can lead to report adjustments, regulatory sanctions, and loss of credibility with investors.

How the evidence trail is created

For a construction investment to be recognized as EU Taxonomy-compliant, a complete evidence trail must be established. This process includes several stages:

1. Identification of the economic activity

The first step is to determine which activity from the EU Taxonomy list applies to the investment.

2. Assessment of technical criteria compliance

At this stage, project technical parameters are analyzed, such as energy efficiency, construction standards, and life cycle emissions.

3. Verification of the DNSH principle

It must be demonstrated that the investment does not cause significant harm to other environmental objectives.

4. Documentation of data sources

Each environmental parameter must be supported by documentation, e.g., energy certificates, LCA reports, EPD declarations.

5. Audit

In many cases, verification by an independent auditor is necessary.

Environmental data infrastructure

With the development of climate regulations, the demand for environmental data infrastructure for the real estate sector is increasing. Such infrastructure includes:

• databases of construction materials containing carbon footprint information,
• LCA analysis systems allowing calculation of life cycle building emissions,
• ESG reporting systems enabling preparation of reports compliant with EU regulations,
• MRV platforms (Monitoring, Reporting, Verification) ensuring data consistency, auditability, and verification by financial institutions.

In practice, this means the emergence of new digital infrastructure for the construction and financial sector, enabling the collection, verification, and analysis of environmental data related to real estate investments.

The EU Taxonomy introduces a new standard for evaluating construction investments financed by the financial sector. For banks, funds, and institutional investors, this means the need to implement processes that allow proving investment compliance with sustainable finance criteria.

In practice, this requires collecting and analyzing a wide range of data, including building energy efficiency, greenhouse gas emissions, environmental impact of construction materials, and resource and waste management.

At the same time, ensuring the auditability of environmental data, which underpins the classification of investments as EU Taxonomy-compliant, remains one of the greatest challenges.

Therefore, in the coming years, the development of environmental data infrastructure will play a key role, enabling banks and investors to safely finance projects in accordance with green financing buildings EU principles and the broader sustainable finance framework in the real estate sector.