(By Alexandra Smedoiu, Partner and Real Estate Industry Leader, Deloitte Romania, and Irina Dimitriu, Partner, Reff & Associates | Deloitte Legal, Head of the real estate practice)
The EU aims to be climate-neutral by 2050, a goal that also involves decarbonising buildings as to diminish their extensive direct and indirect impact on the environment. During the construction, occupancy, renovation, repurposing and demolition, buildings use energy, water and raw materials, generate waste and potentially harmful atmospheric emissions. These factors have prompted the creation of green building standards, certifications and rating systems aimed at mitigating the impact of newly developed constructions on the environment through sustainable design.
Considering the need for increased transparency in informing shareholders and investors on the companies’ impact on people and environment, the European Commission recently adopted the Sustainable Finance Package to help the redirection of private capital towards green activities. The package includes a new Corporate Sustainability Reporting Directive (CSRD), which would revise the existing reporting rules introduced for public-interest entities by the Non-Financial Reporting Directive (NFRD). The CSRD proposal extends the scope of the NFRD to all large companies and listed companies.
Basically, we expect that a wider range of companies (all large companies, either listed or not, as well as SMEs) will become publicly accountable for their impact on people and the environment.
At the request of EC, the European Banking Authority (EBA) published a set of KPIs for the disclosure by credit institutions and by investment firms of information on how and to what extent their activities qualify as environmentally sustainable. Moreover, the EBA underlines the importance of the green asset ratio as a key means to understand how institutions finance sustainable activities. These actions could result in lower funding costs for projects compatible with EU environmental objectives.
Therefore, EBA took a step further as compared to the EC in the sense that the companies’ accountability for their impact is no longer sufficient, but the development of green projects is financially encouraged.
At the same time, the EBRD new Green Economy Transition (GET) approach for 2021-2025 includes climate action to reduce energy and carbon intensity and sets a new target to reach a green finance ratio of more than 50% by 2025. In real estate, the bank’s priorities include the management and development of green and sustainable buildings.
All principles and public statements supporting the green projects may sound rather theoretical for other industries, but for real estate in particular, things are changing even faster than anticipated. As such, starting this year, all new buildings must meet the NZEB standard.
What is NZEB?
Buildings consume 40% of the total energy and emit 36% of the greenhouse gas in Europe, therefore representing a high potential for energy savings. In the recast Energy Performance of Buildings Directive (2010/31/EU), the term Nearly Zero-Energy Building (NZEB) was defined as a “building that has a very high energy performance.” The directive states that, as of January 2019 for public buildings and January 2021 for others, all newly built construction should reach the NZEB target in all member states, including Romania.
Within this perspective, bank financing will surely be oriented to the projects eligible for ensuring the transition to a sustainable economy. There are already banks in Romanian that have announced that, if they had to choose between two projects, one with a green component and another without one, the first one would have priority in financing, even under less favorable conditions for the bank.
So real estate developers will likely follow these trends in order to comply with the new sustainability standards, but to also facilitate access to the best financing for their projects. As a source of funding, they can also consider European funds granted through the Next Generation EU (National Recovery and Resilience Plan in Romania – PNRR), given that the plan is strongly linked to the need to fight climate change with the objective of reducing greenhouse gas emissions.
The manner in which this mindset change will reshape the cities of Romania is yet to be seen. The next question is whether Bucharest will champion this new wave or other major cities (such as Cluj-Napoca, Timisoara or Iasi) will start setting the tone. Let the “green” and “sustainable” music play!