Taxonomy reverts to ‘top 15%’ for buildings, sparing green covered bonds

The final EU Taxonomy delegated act looks set to prove accommodating to green covered bonds, with a new leaked version aligning with current market practice of the top 15% most energy efficient buildings, as originally recommended by the TEG, and other criteria also relaxed.

The European Commission’s original draft delegated act in November had threatened to undermine green bond issuance with buildings as use of proceeds by requiring EPC A labels for existing buildings in the key acquisition and ownership category, alongside other criteria that were more stringent than those widely used by green bond issuers, particularly of covered bonds, among whom the top 15% criteria had been widely adopted.

An updated version leaked last month already proved more accommodating, by, for example, allowing buildings with class B EPCs, but the latest version has reverted to the recommendation of the Technical Expert Group (TEG) in permitting the top 15% standard to be used as an alternative to EPC class As:

For buildings built before 31 December 2020, the building has at least an Energy Performance Certificate (EPC) class A. As an alternative, the building is within the top 15% of the national or regional building stock expressed as operational Primary Energy Demand (PED) and demonstrated by adequate evidence, which at least compares the performance of the relevant asset to the performance of the national or regional stock built before 31 December 2020 and at least distinguishes between residential and non-residential buildings.

The criteria for new buildings have also been relaxed, with “nearly zero energy buildings” (NZEB) requirements having to be bettered by 10% rather than 20% for eligibility.

Alongside those changes to the climate change mitigation parts of the delegated act, the latest version eases “do no significant harm” (DNSH) criteria related to buildings in the climate change adaptation part. These had already been amended from allowing just B class or better buildings to encompass C class, and have now been expanded with an alternative criterion allowing the top 30% most energy efficient properties.

The 15% threshold for existing buildings will allow eligibility for some with EPCs – which are not harmonised across the EU – as low as D in some countries, while the 30% threshold could encompass some class E properties.

With the updated text expected to be formally adopted by the Commission on Wednesday, the result looks set to be a successful outcome for the covered bond industry, which had been lobbying for the 15% standard, after the threshold had been not only recommended by the TEG but also used by the Climate Bonds Initiative for certification of relevant green bonds.

“The anticipated outcome reflects a very constructive approach on the part of the European Commission,” Luca Bertalot, secretary general of the European Mortgage Federation-European Covered Bond Council (EMF-ECBC), told Sustainabonds. “We are very pleased to see the attention they have paid to the input of the banks involved in the Energy Efficient Mortgage Label in recent weeks and have tried to be closer to market practice.”

He said the revised version of the delegated act brings it closer to the standards envisaged under the Energy Efficient Mortgage Label, with any alignment of the two to be discussed at a meeting in June.

“With these most recent developments in mind, we are confident that the EEM Label and green covered bonds will play a pivotal role in implementing the Taxonomy and supporting the Renovation Wave Strategy and EU Green Deal,” added Bertalot.

ABN AMRO