A five-point proposal for a more workable EU taxonomy
Berlin, January 28, 2025
- GdW and vdp call for sweeping changes to regulatory framework
Since the EU taxonomy came into force, the Federal Association of German Housing and Real Estate Companies, GdW, and the Association of German Pfandbrief Banks, vdp, have criticised many of its aspects as unworkable in practice. Now, both associations have published a joint position paper in which they set out their key objections and put forward specific recommendations for improvement.
Both GdW and vdp remain firmly committed to the intention behind the Green Deal of channelling investment into environmentally friendly projects and, in this way, contributing to achieving the EU's climate goals. However, the two associations believe that the current structure of the overarching regulatory framework for sustainable finance is not fit for purpose:
“In its scope and complexity, the EU taxonomy has reached a level that puts enormous pressure on the resources of credit institutions, companies and consumers and, as such, significantly diminishes the framework's prospects of success”, warns Sascha Kullig, a member of vdp's Management Board.
“The EU taxonomy exclusively prioritises the treatment of buildings with the best energy efficiency performance”, stresses GdW-President Axel Gedaschko. “That means the vast majority of capital flows into property that has been renovated to a very high standard. This approach discriminates against those with poor energy efficiency ratings and, in turn, undermines the EU's climate goals.”
In the view of both associations, recommendations published by the Platform for Sustainable Finance on 8 January 2025 on changes to the taxonomy only represent a small step in the right direction. From the standpoint of the financial and housing sectors, vdp and GdW have identified five key obstacles in the EU taxonomy that stand in the way of achieving the EU's climate goals. At the same time, both associations have outlined a number of possible solutions:
1) The requirements for new buildings in terms of their Primary Energy Demand increase construction costs without making any significant contribution to reducing carbon emissions.
>> Detailed criticism:
The EU taxonomy states that the Primary Energy Demand (PED) of any building constructed after 31 December 2020 must be at least 10 % lower than the threshold set for nearly zero-energy building (NZEB) requirements in national measures. This rule prevents the affordable construction of new buildings and undermines efforts by Germany and the EU to reduce the cost of construction and, in this way, increase the supply of affordable housing.
>> Solution:
GdW and vdp call for energy efficiency requirements to be aligned with national measures for nearly zero-energy buildings rather than exceeding them. Both associations feel that this would be conducive to achieving more cost-effective new buildings and more affordable rents.
2) There are glaring contradictions between the EU taxonomy and the EU Energy Performance of Buildings Directive (EPBD).
>> Detailed criticism:
While the EU taxonomy's requirements are almost exclusively focused on the ultimate goal of net zero (“best-in-class” approach), the aim of the EU's Energy Performance of Buildings Directive (EPBD) is to upgrade buildings that currently have the worst energy efficiency performance (“worst-first” approach). It is absurd to pursue two entirely contradictory approaches in two regulatory proposals, both of which originate from the same institution and share the same goal. This inconsistency has given rise to considerable uncertainty in the financial sector as well as the real economy and is delaying the implementation of measures to improve energy efficiency.
>> Solution:
GdW and vdp are of the opinion that the EPBD's focus on buildings with the worst energy efficiency performance has a considerably better chance of succeeding than the opposite approach taken by the EU taxonomy rules. Both associations point out that renovating buildings with poor energy efficiency ratings can achieve significantly greater and more rapid efficiency gains than is the case for buildings that already have a high energy efficiency performance. In light of this, GdW and vdp call for a harmonisation of the approach towards energy efficiency in both regulations so that the regulatory framework for sustainable finance adopts a consistent worst-first approach as its goal.
3) The bar for Taxonomy alignment has been set too high. There is no acknowledgement of net zero pathways and efficiency gains from renewable energy sources.
>> Detailed criticism:
To be considered Taxonomy-aligned and benefit from favourable financing conditions, renovation work must result in a minimum reduction of 30 % in a building's Primary Energy Demand. In future, financing costs may increase for renovation work that achieves lower energy efficiency gains as a result of not being Taxonomy-aligned. The same applies to buildings that adopt a long-term net zero pathway but currently have poor energy efficiency ratings. In addition, the taxonomy does not provide for the recognition of efficiency gains from renewable energy sources when buildings undergo energy efficient renovations.
>> Solution:
GdW and vdp advocate an amendment to the taxonomy that would recognise all types of renovation work that achieve energy efficiency gains along a defined net zero pathway as Taxonomy-aligned, including efficiency gains from using renewable energy sources. Furthermore, both associations call for a whole building and its entire financing, unlike in the past, to be classified as Taxonomy-aligned if the taxonomy requirements for an energy efficient renovation are met.
4) The “Do No Significant Harm” (DNSH) criteria referred to in the EU taxonomy lead to unjustified and substantial extra costs.
>> Detailed criticism:
According to the EU taxonomy, failure to comply with even one of the six DNSH criteria renders a building and its financing non-Taxonomy aligned. For example, if the plumbing system in a property exceeds a certain threshold, the entire building and its financing lose their taxonomy eligibility - regardless of how energy efficient the building may be. The audit procedures required are so time consuming and involve such extensive documentation that the costs and benefits end up being out of all proportion to one another. What is more, the significant additional costs that this adds to renovation work have a direct impact on the affordability of living space and jeopardise acceptance in society of the very principle of the transition to net zero.
>> Solution:
Irrespective of the relevance of all DNSH criteria, GdW and vdp take the view that the number and complexity of their associated requirements are unacceptably high. To counter this, the associations propose, in particular, that requirements for the criteria of “construction of new buildings” and “renovation of existing buildings” should be significantly reduced. In addition, they recommend that all DNSH criteria should be designated as “monitoring criteria”, so that non-compliance with any one provision does not automatically result in the loss of taxonomy alignment.
5) Environmental criteria are the sole focus of the EU taxonomy. It fails to consider any social dimensions.
>> Detailed criticism:
The EU taxonomy's narrow focus on environmental goals means that projects that yield social benefits, for example, take a back seat. Yet policymakers and the business community agree that incorporating social aspects into urban planning contributes to a community's overall well-being.
>> Solution:
GdW and vdp advocate the inclusion of sociocultural aspects into the existing framework of the taxonomy in order to create a balance between environmental and social dimensions. This would ensure that credit is also given to non-quantifiable factors that contribute to social cohesion, such as those provided by housing associations within the scope of their statutory remit. Specifically, Specifically, the two associations are proposing the introduction of compensatory mechanisms: For instance, if a building provides comparatively low rents, is located in a neighbourhood with a high quality of life or is close to community facilities, this could offset any failure to meet certain environmental requirements. By taking this approach, a significant number of additional properties and loans could be made Taxonomy-aligned.