DWS calls for ambition and alignment to decarbonise the sector, as BPIE warns EU building stock a long way from achieving climate goals.
EU lawmakers must remain ambitious in their recasting of the European Performance of Buildings Directive (EPBD) to encourage increased investment in the renovation of carbon-intensive real estate.
“It is hoped that the EPBD will include provisions addressing existing [EU-based] buildings and their [climate-related] performance in such a way as to stimulate sustainable investment,” Aleksandra Njagulj, Global Head of ESG, Real Estate, at Germany-headquartered DWS, told ESG Investor.
“But, above all, it is clarity of future requirements that is needed,” she added.
“My key worry is that the recast EPBD will not be sufficiently specific to allow for planning, and the industry will be forced to wait much longer for national regulations for any kind of certainty, which would certainly delay progress.”
Back and forth
First introduced as part of the European Commission’s Fit for 55 (Ff55) raft of decarbonisation measures in 2021, the revised EPBD outlined plans to introduce minimum energy performance standards (MEPS) to renovate 15% of the worst-performing buildings in each EU country by 2030.
It also encouraged the accelerated development of, and transition to, zero-emission building stock.
According to the Commission’s definition, a zero-emission building would not generate carbon emissions on-site.
Parliament took a more ambitious stance overall, determining that all new buildings should be zero-emission from 2028 and existing buildings would need to achieve climate neutrality by 2050. Further, residential buildings would have to achieve a minimum energy performance rating of Class E by 2030 and Class D by 2033.
After over two years, negotiations on the EPBD are expected to close by the end of December, with the proposed changes being signed into law ahead of the next EU elections taking place in June 2024.
However, there is mounting concern that the directive will be watered down, following challenging trilogue discussions, which first commenced in June of this year.
The proposed MEPS have become highly politicised, with a 15-country coalition led by Italy and Poland opposing the EPBD earlier this year. In the opposite camp, a six-country group led by France and Germany aimed to uphold the Commission’s ambition.
In October, representatives of the European Parliament and EU member states held a closed-door meeting, within which the mandatory renovations were abolished and replaced by benchmark averages for each EU country, empowering each state to set out their own renovation trajectories.
It was also determined that member states should be allowed more leeway in defining zero-emission buildings (ZEBs), meaning the threshold for a property to reach ZEB status may be easier to attain in some countries.
Earlier this year, the Institutional Investors Group on Climate Change (IIGCC) wrote to EU lawmakers, calling for an “ambitious” outcome for EPBD-focused negotiations. The IIGCC noted that that improving the energy performance of the EU’s building stock is “vital” to achieve the bloc’s climate and energy security goals.
Getting back on track
Njagulj told ESG Investor that ambitious regulation is crucial to “level the playing field and bring everyone on board” to decarbonise a very carbon-intensive sector.
Buildings are responsible for 40% of EU energy consumption and 36% of the bloc’s energy-related greenhouse gas (GHG) emissions. The International Energy Agency has outlined that 50% of all existing buildings need to be net zero by 2040, increasing to 85% by 2050.
Earlier this month, NGO Buildings Performance Institute Europe (BPIE) published the second edition of its EU Buildings Climate Tracker (EU BCT), which monitors the decarbonisation progress of EU building stock towards the goal of achieving carbon neutrality by 2050. BPIE does this in the form of an index, which covers 2015-20 and is composed of five indicators monitoring CO2 emissions, final energy consumption, renewable energy share, investments in renovation, and domestic energy expenditures.
It noted that EU building stock remains off track to achieve climate neutrality by 2050 and is also “far beyond the path” to meeting 2030 climate targets.
In 2020, CO2 emissions from energy use in buildings reached 422 metric tonnes (Mt), more than 18% higher than the required goal value, according BPIE. Further, the share of renewable energies for heating and cooling was around 30% lower and accumulated investments in renovation were 40% lower than required.
The decarbonisation gap may be reducing slightly when compared to last year’s results, the report said, but the sector needs to demonstrate 4.7 points of decarbonisation progress against the tracker every year if EU building stock is to get on track by 2030.
Analysis of Central and Eastern European (CEE) countries highlighted that progress decarbonising building stock in the region is 21 points off the required pace of emissions reduction – the largest gap since the beginning of the tracker period in 2015. CEE countries require 5.7 points of progress per annum to get on track by 2030.
“As the main legislative instrument to advance the decarbonisation of buildings in the EU, the EPBD must unequivocally put us on the path to meet our 2030 targets and climate neutrality,” said Oliver Rapf, BPIE’s Executive Director.
Njagulj from DWS emphasised the importance of all sustainable finance-focused regulation aligning to support the delivery of the directive.
“While not solely focused on real estate investment, Sustainable Finance Disclosure Regulation (SFDR) provisions related to principal adverse impacts, and consequently what was understood as a sustainable investment under this regulation, are very important for the transition of real estate,” she said.
The EU’s environmental taxonomy, which outlines which economic activities can be considered by investors, lists energy renovations for ‘brown’ buildings as a ‘transitional activity’, which creates a perception in the market that investing in building renovations is not as sustainable as investing in new green builds.
The opportunities in sustainable refurbishment are nonetheless very clear and not limited solely to energy performance, according to Njagulj, pointing to “embodied carbon retention, adaptive reuse, and wellbeing aspects”.
A report published last year by research and data provider Moody’s estimated that an additional €275 billion (US$301 billion) a year of investment in EU energy efficiency building renovations will be needed by 2030.
“The longer we delay, the harder it will be to get on track,” the BPIE report said.
“Now is the time to bring the EU building stock on track towards climate neutrality.”