ESG has become a really hot topic recently and it seems to be on everybody’s radar. But before we can go into the reasons why, and specifically why for example it really matters to construction projects, we should first look at what it is.

ESG stands for Environmental, Social, and Governance and they are financial services terminologies. ESG are headings whereby the non-financial activities of an investable product – or in our case a development – are reported under. They are used mainly to clarify the risks associated with investments.

ESG stems from the knowledge that there is a lot more to a product or a development than just its rate of return. For example, if a development doesn’t have a main contractor who values its employees, this may have a negative impact on the construction’s completion time due to a high turnover in staff. This is something that may be captured and reported under the Social part of ESG.

In the past, a form of ESG was attempted in developments by the application of green building certifications. It was deemed by some investment firms that where a development had excellent or platinum ratings, then the development was less risky from an ESG perspective. This, however, was not always the case, as it became evident that some high-scoring green certified building was not actually any greener, or less risky, than its uncertified peers.

So where are we now legally?

Today in Europe and the UK we are required by law to report the non-financial activities of companies(1), and from March 10, 2021, we are required specifically to report the ESG activities of large companies(2).

From January 1, 2022, both in the UK and the EU, all companies will have to report there ESG activities against the EU Taxonomy(3) and specifically in the EU 27, the delegated acts. A caveat here for the UK is that the delegated acts which are really the meat of the EU taxonomy legislation are not automatically law in the UK because of Brexit. It is, however, expected that there will be a UK taxonomy, which will closely match or exactly mirror the EU Taxonomy(4).

Incidentally, many other countries are now following the EU on this and are developing and introducing their own versions of the taxonomy. For example, China is currently working on theirs, and the governor of the Peoples Bank of China, Yi Gang, recently said that there’s is 80% aligned with the EU Taxonomy(5).

What the EU taxonomy does and doesn’t do

The EU taxonomy really only addresses the E of ESG, by using as a benchmark the overarching legalised commitments we all have made in Europe, that is the Paris Agreement.

The Paris Agreement goal is to keep the rise in mean global temperature to well below two degrees Celsius above pre-industrial levels, and preferably limit the increase to 1.5 degrees Celsius.

The taxonomy anticipates policy measures and regulatory constraints that are inevitable if Europe and the UK is to meet these climate targets by 2050. For the S of ESG the EU will publish a social taxonomy probably around December 2021.

How does the taxonomy affect my development?

The way in which the taxonomy works (EU or UK version) is that it sets out specific targets, assessments and procedures which a development must follow in order for the development to say its 100% aligned with the taxonomy, or that it is climate neutral up until 2050. Taxonomy alignment at the moment is binary, that is, you are either fully aligned or your not aligned at all.

For example, for any development being constructed today, the energy performance of the building resulting from the construction, should be at least 10% lower than the threshold set for the nearly zero-energy building (NZEB).

In other words, it should be Part L compliant and have an additional 10% of renewables installed. Other requirements include such things as the undertaking of a Climate Risk and Vulnerability Assessment, and the calculation of the 'global warming potential' of the development.

A major risk for EU taxonomy alignment is that the NZEB requirement needs to be demonstrated in use. This means that once the building is occupied, the building needs to be assessed and a new ‘as built BER’ produced.

The major risk here is that buildings have been shown to use more energy than what they were design to use(6). A study undertaken in Ireland by Bryan Coyne and Eleanor Denny(7) showed that Irish buildings with a BER of A or B used 39% more energy than what they were designed for. This means that your initially designed NZEB building may actually be performing more like a B2 or B3 building and is therefore not EU taxonomy aligned.

Developments will have to be undertaken so that this energy performance gap is closed. This will probably mean greater commissioning, better training of supervisory staff, and perhaps performance-based contracts with designers and installers.

Why align with the taxonomy?

If a development is not aligned with the EU taxonomy, then there is a significant risk that the developments useful life will be curtailed by future climate regulations or will require additional (hidden) investments(8). There is also the strong possibility that access to insurance will also become more expensive and, in some cases, not achievable(9).

There is also the legal requirement whereby large companies must report there sustainable or ESG activities against the screening criteria defined within the EU taxonomy delegated acts. These large companies include pension funds, banks, and institutional investors. In other words, the companies at the top of the financial chain who the developer must align with to get finance.

So, in summary, a prudent business plan for all developments would require alignment with the taxonomy, as this is the only way to hedge for transitional risks or future climate law changes up to 2050. It will also allow the development to access finance easier, with better terms and conditions. 

Author: Ciaran O'Leary, MEng MIEI MPHAI BREEAM AP,​ is head of ESG at i3PT. He is also a climate pact ambassador with the European Commission.


1.) The non-financial disclosure regulation (NFDR)

2.) The Sustainable Finance Disclosure Regulation (SFDR)

3.) The EU Taxonomy



6.) C van Dronkelaar, M Dowson, E Burman, C Spataru, and D Mumovic, 'A review of the energy performance gap and its underlying causes in non-domestic buildings', Frontiers in Mechanical Engineering, vol. 1, p. 17, 2016.

7.) Coyne, B., Denny, E. Mind the Energy Performance Gap: testing the accuracy of building Energy Performance Certificates in Ireland. Energy Efficiency 14, 57 (2021).

8.) Peter Sweatman and Malte Hessenius. Applying the EU Taxonomy: Lessons from the Front Line. Climate Strategy & Partners, 2020.

9.) Urban Land Institute & Heitman. Climate Risk and Real Estate Investment Decision-making, 2019.