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02 April 2020

European Climate & Environment Regulatory Updates

By Emily Shaw 

 Government regulations create the rulebook for real estate investors to engage in the real estate market. In recent decades, this rulebook has been changing to incorporate concerns for climate change and environment as governments across Europe are increasing their ambition to reduce carbon emissions and pollution. To provide better services for our clients, Longevity Partners conducts ongoing research and analysis to identify the significant policy trends and the impacts of the climate and environmental regulations in sixteen European countries.? 

 Our analysis focuses on understanding the risk of regulations on real estate investors' activities. For climate and environmental regulations, real estate investors are often impacted significantly because the building sector is currently responsible for 36% of all carbon emissions across Europe [1] and the level of urbanization in Europe is expected to increase from 75% in 2020 to 83.7% in 2050 [2]. Without government regulation to ensure the reduction of emissions in the building sector, the growing urbanization of Europe may lead to an increase in emissions. Therefore, as governments are becoming more and more ambitious with their climate targets, the building sector will be required to comply with more stringent regulations.? 

 In our analysis, we examined environmental and climate regulations from each of the sixteen countries and categorized them in seven environmental categories. These categories include, 1) Carbon Emissions & Energy; 2) Water; 3) Waste & Materials; 4) Building Labels & Standards; 5) Land Use Change & Adaptation; 6) Corporate Reporting Requirements; 7) Biodiversity. Then, we analysed the risk of each regulation by determining the direct and indirect impact of the regulation on the activities of real estate investors. As a final step, we also assessed the overall risk severity of the seven environment categories for each country depending on the direct impact of regulations. 

Outcomes of the Most Recent Analysis 

 Over the past six months, Longevity's European regulation research has focused on regulatory changes since October 2019 and has identified two categories of changes: 

  • 1. The European Union has adopted new climate regulations as a part of the European Green Deal, which has resulted in many Member States updating their legislation accordingly.
  • 2. Individual states have updated policies or adopted new legislations to address local crisis or challenges. 

 

1) EU level policy changes? 

Since December 2019, the EU has been debating the European Green Deal, which is the plan for Europe to become the first climate-neutral continent by 2050. It aims to increase ambitions and targets for many EU Directives regarding climate and the environment. It was agreed upon by the EU in March 2020, however our research found that many member states have already implemented the changes. For example, many countries have updated their climate legislation to include the increased targets and therefore made the regulations stricter. Germany is one the first states to make their new emissions targets law. Under this new legislation,?Klimaschutzgesetz or Climate Protection Law (2019),?the building sector will have to cut emissions by 20% by 2025 and by 40% by 2030, along with yearly reduction targets. If the sector does not meet its yearly targets, this regulation gives the relevant departments the power to implement an emergency action plan to meet the targets [3]. Other member states have implemented changes to different regulations, such as Luxembourg and the Czech Republic that have both made amendments to their EU Emission Trading Systems (EU ETS) regulations. As well, the Netherlands have updated their European Performance of Building Directive (EPBD) regulation and passed a new building certification legislation, Bijna Energie Neutrale Gebouwen (BENG) to transpose the new EU Directives.

The European Green Deal has and will result in many policy changes across the EU's member state regulations. For the real estate sector, this increased ambition means that stricter legislation is excepted. Therefore, to reduce the risk associated with this policy change, real estate investors should be aligning their emissions reduction targets with the Paris Climate Agreement. Currently, as the Alliance for Corporate Transparency highlighted in their research, many large companies across Europe still do not have clear Key Performance Indicators (KPIs) for climate and environmental factors and do not engage in climate risk modelling [4]. As risk of policy change increases, real estate investors should develop targets, KPIs and conduct risk modelling across their assets to pre-empt any stricter policy change.

Our analysis also highlighted EU level policy change separate from the carbon emissions and energy category. The European Green Deal also emphasized the circular economy and phasing out plastic. The EU passed a ban on single use plastics starting in 2021. Therefore, many member states transposed this ban on single use plastic, such as France and Luxembourg or implemented policies to encourage the circular economy, as in the Netherlands. 

 Overall, we can expect a lot of changes in policies being directed by the EU as soon as Member States transpose all the different aspects of the European Green Deal. Real estate investors should also assume that these policies will be stricter as the EU increases its emission reduction targets and as simple reductions are been reached. 

2) Country level policy changes to address local crisis 

 Our analysis highlighted another category of policy change across the sixteen countries. Aside from just transposing the Green Deal, some countries implemented or amended policies to address local crisis or concerns.?The following are some examples from different countries.  

 In France, after significant protesting, the Government froze the carbon tax on fuel until 2022 to meet some of the demands of the Mouvement des gilets jaunes, even with the EU pressures to increase climate ambition.

Whereas in Sweden, two years after the passage of The Climate Act, the Swedish government was finally able to implement the first Climate Action Plan for the next five years. Though the creation and implementation of this plan was delayed as Sweden did not have a formal government from September 2018 to January 2019.

 Most notably, the Dutch government needed to implemented emergency law in late 2019 to address the ‘Nitrogen Crisis.’ In 2019 the Programme Aanpak Stikstof (PAS), a policy regulating the amount of Nitrogen that construction projects can emit, was declared unlawful by the Dutch Council of State. This declaration resulted in halting many construction projects and even with the temporary emergency law, there are dramatically fewer construction projects across the Netherlands. This crisis in the Netherlands resulted in our researchers increasing the risk severity of the Biodiversity category for real estate investors.

For real estate investors, these local policy changes are unpredictable, which highlights investors responsibility to working with local governments where their assets are located. 

Conclusion?

Due to the European Green Deal and local concerns regarding the environment, there will likely be more legislation changes soon across the sixteen analysed European countries. However, due to the current COVID-19 pandemic, governments will likely delay their transposition of the EU directives and the implementation of local policies will be focused on mitigating the impact of COVID-19.