Blog Posts - 04.09.2024
Relevance of Sustainability in the Real Estate Sector.
The terms ESG (Environmental, Social, and Governance) and sustainability have become increasingly important in all sectors in recent years. The property industry in particular is a major source of environmental impact: 35% of global energy consumption, 50% of global resource consumption and a significant proportion of CO2 emissions are caused by this sector (source: Schäfer & Martel, 2021). The implementation of ESG criteria in property portfolios is therefore a key issue in order to achieve net zero emissions by 2050 and future-proof building portfolios.
What does ESG mean?
Similar to the umbrella term Corporate Social Responsibility (CSR), ESG deals with corporate disclosures on environmental, social and ethical practices. Developed by the EU Commission, ESG stands for Environmental, Social and Governance and is intended to make it easier to monitor and manage corporate performance and its social impact.
ESG criteria are increasingly relevant for the property sector, as they assess the sustainability of construction and renovation projects and require transparent reporting on environmental and social impacts. A study by Deloitte also shows that property companies that integrate ESG criteria into their business practices not only fulfil legal requirements, but can also strengthen their market reputation and potentially achieve higher returns (source: Deloitte, 2022).
Effective ESG investment strategies and measures.
The EU taxonomy emphasises the importance of complying with ESG criteria. These are crucial not only to avoid fines, but also to make investments more attractive on the market and increase their value in the long term. Below we present some effective ESG investment strategies that enable the economic development of ESG projects.
Sustainability strategies in the property portfolio:
- Energy efficient buildings:
Real estate companies should ensure that their buildings are energy efficient, for example by using energy-efficient heating, ventilation and air conditioning (HVAC) systems, smart LED lighting and high-quality insulation. - Reduction of CO2 emissions:
ESG measures include the use of renewable energy, the installation of solar panels and the optimisation of energy consumption. - Efficient water utilisation:
This can be achieved through the use of water-saving fittings, rainwater collection systems and grey water recycling systems.
Social responsibility in the property sector:
- Affordable housing:
Real estate companies can develop projects that provide affordable housing options to meet the housing needs of the community. - Healthy living environments:
This includes adhering to strict building codes, safe construction site practices and providing healthy living environments free of pollutants. - Community projects:
Property developers can create community spaces, support social programmes and promote social cohesion initiatives.
Sustainable governance practices in property management:
- Transparent reporting:
Real estate companies should have clear and transparent reporting practices that allow investors and the public to understand their business practices and results. - High ethical standards:
This means that property companies follow fair business practices, fight corruption and conduct their business honestly and with integrity. - Compliance with regulations:
Real estate companies must ensure that they comply with all relevant laws and regulations, including building codes, environmental regulations and labour regulations.
ESG regulations in the EU.
As of today, not all real estate companies in the EU have to comply with the ESG criteria catalogue. However, capital market-oriented companies and non-capital market-oriented companies that fulfil two of the following three criteria are affected:
- Balance sheet total > EUR 20 million
- Net turnover > EUR 40 million
- Employees > 250
The EU’s ESG legal framework comprises various regulations and directives that together promote sustainable development and transparency:
- EU Green Deal:
The EU Green Deal is a comprehensive package of measures from the European Commission that aims to achieve a climate-neutral Europe by 2050. It includes measures to promote sustainable investment, reduce CO2 emissions and support the energy transition.
As a result of the EU Green Deal, property companies must now increasingly invest in energy-efficient technologies and sustainable construction methods. There are stricter regulations for new buildings and renovations to minimise CO2 emissions. This can lead to higher initial construction costs, but offers long-term savings in energy costs and improves property value. - Corporate Sustainability Reporting Directive (CSRD):
The CSRD extends companies’ ESG reporting obligations, thereby promoting transparency and comparability. Companies must submit more detailed and standardised reports on their sustainability practices and performance.
The CSRD obliges property companies to prepare more comprehensive sustainability reports. This means additional effort and costs for the collection and reporting of ESG data. At the same time, companies that demonstrate good sustainability performance can benefit from a better reputation and potential investment advantages. - Sustainable Finance Disclosure Regulation (SFDR):
The SFDR regulates the integration of sustainability risks into financial decisions and increases transparency on ESG issues. Financial market participants and financial advisors must disclose how they take sustainability risks into account and how these can affect returns.
The SFDR will increase the scrutiny of property investments for their sustainability aspects. Companies in the property sector must demonstrate sustainable practices in order to gain access to financing and remain competitive. This can lead to a redistribution of investments towards more sustainable projects. - EU-Taxonomy:
The EU taxonomy defines sustainable measures to achieve environmental goals and acts as a link between the CSRD and the SFDR. It provides clear criteria for determining which economic activities are considered environmentally sustainable (source: ESG-Volution).
Property companies must assess their projects and activities against the EU Taxonomy criteria and ensure that they are considered environmentally sustainable. This increases the pressure to implement sustainable construction and renovation practices. Companies that fulfil these criteria can more easily obtain sustainable financing and strengthen their market position.
Together, these regulations and directives form the foundation of the ESG legal framework in the EU. They help to ensure that companies and investors integrate sustainable practices into their business strategies and ensure transparent reporting. Compliance with these regulations is crucial to remaining competitive in the long term and maximising the value of investments.
European countries that are not part of the EU have now also taken stricter measures around the property sector. In Switzerland, for example, the “Energy Strategy 2050” has been introduced, which requires the property sector to reduce its CO2 emissions to 65 TWh by 2050 (source: BFE).
Balance between sustainability and economic efficiency.
ESG investments not only assume environmental and social responsibility, but can also achieve long-term economic benefits. A prime example of this is the measure to improve energy efficiency. Reducing energy consumption leads directly to cost savings. For example, the existing lighting can be replaced with an intelligent LED lighting system, resulting in energy savings of up to 90 %. This investment is amortised in just 2-3 years thanks to the high savings and rising energy prices.
Another exciting aspect of this is ESG sustainability reporting. Modern, IoT-based lighting systems enable the collection of important data, such as actual energy savings and optimisation opportunities in other areas, such as heating. You can read more about data in buildings in this blog.
A successful example of this is the redevelopment of the ZHil neighbourhood near Manegg in Zurich by Mobimo, a Swiss property owner. The project report shows how Mobimo AG has achieved a balance between cost-effectiveness and sustainability. Find out more about the ZHil Manegg project.
Why investing sustainably is crucial now.
Even if not all companies in the EU are currently obliged to fulfil ESG criteria, it still makes sense to invest sustainably now. The number of companies affected has increased significantly in recent years and it is foreseeable that the EU ESG regulations will affect more companies in the future. In addition, it is already clear today that investments in sustainable practices can significantly increase the value of property portfolios. Investments in the energy efficiency of buildings are particularly noteworthy, as they lead to both significant cost savings and a higher market value. Arrange a free, 15-minute consultation to find out how you can comprehensively prepare your building portfolio for the future:
