Navigating sustainable finance: Key factors for the real estate industry

Non-financial reporting, as well as disclosure and trans­parency oblig­a­tions, are becoming increas­ingly important in Europe and Switzerland. ESG (environ­mental, social, and gover­nance) and sustainable finance are partic­u­larly prevalent topics at the moment. But what exactly do these terms mean? And what is their signif­i­cance in the context of real estate and its invest­ments?

This article provides an overview of these topics, key facts, and their main drivers.

Sustain­ability and its main drivers

ESG: Sustain­ability in three dimen­sions

The ESG concept comprises three areas: environ­mental, social, and gover­nance, which are repre­sented by a large number of different indicators. These criteria are generally used to assess a company’s impact on the environment beyond its financial perfor­mance. ESG measures include topics such as resource consumption, diversity in the workplace, and corporate gover­nance. By taking ESG factors into account, companies can make more informed decisions, reduce risks, and strengthen their reputation.

In the real estate sector, example indicators include CO2 emissions that a building emits and whether renewable energies are used to heat a property. Social aspects such as site location, acces­si­bility, or user well-being can also be included as ESG KPIs (key perfor­mance indicators) to make these and other aspects quantifiable and traceable as part of an ESG rating. However, these three areas cannot always be clearly separated from each other, which results in overlaps. The sometimes complex question of the exact allocation of individual ESG indicators can also lead to discus­sions among industry players when it comes to prior­i­tizing or weighing the various indicators or the effect they (should) have. In other words, which dimension should come first – E or S, S before G? For example, many insti­tu­tional investors often pursue a sustainable approach when choosing their real estate invest­ments, while at the same time taking profitability/return into account.

Sustainable finance: Sustainable financing

Sustainable finance (SF) is a generic term for the various forms of financial services that integrate ESG criteria into business or investment decisions, which must be closely linked to sustain­ability. In principle, it is about consid­ering the long-term impact on the environment, society, and economic aspects when making financial and investment decisions. This also applies to the real estate sector, and can relate to invest­ments in sustainable real estate funds, green buildings, or the choice of low-emission building materials. Here, topics such as circular economy and sustainable supply chain management are partic­u­larly important to consider.

SF affects not only the financial market itself but also a variety of real estate sectors like investment, portfolio and asset management, real estate devel­opment, sustainability-related loans or projects as well as sustainable, green and/or blue loans. The players involved in SF include a broad spectrum of insti­tu­tional investors, such as banks, insurance companies, stock corpo­ra­tions, and pension funds, alongside real estate managers, consul­tants, and lawyers.

The drivers

Strategy: Sustain­ability is becoming an increas­ingly strategic aspect – and therefore a compet­itive criterion for investors and stake­holders.

Standard­ization: ESG standard­ization and measurement are required to implement goals and change current portfolios.

Perfor­mance: Increasing market demand for improved ESG perfor­mance and impact for individual properties and real estate portfolios.

Trans­parency: Sustain­ability engagement and trans­parency can improve a company’s reputation and brand value.
Reporting: ESG disclosure and reporting are becoming increas­ingly mandatory, partic­u­larly regarding improved ESG risk management.

In principle, the drivers behind the practical imple­men­tation of sustainable finance can be divided into three categories:

Intrinsic drivers can include the motivation to make one’s real estate portfolio or business (more) sustainable and thus contribute to an econom­i­cally and ecolog­i­cally sustainable environment.

Extrinsic motivators primarily include mandatory regulation, which places ever higher demands on sustain­ability. Examples of this include the EU taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the indirect counter-proposal to the Corporate Respon­si­bility Initiative (CRI).

A combi­nation of extrinsic and intrinsic drivers could be a request from a supplier or service provider to partic­ipate in a voluntary sustain­ability framework or initiative, such as the UNPRI, Carbon Disclosure Project (CDP), or Task Force on Climate-Related Financial Disclo­sures (TCFD). However, many of these initia­tives, which are currently still voluntary, are likely to become mandatory in one way or another in the future. It is therefore advisable for companies to deal with these issues strate­gi­cally and proac­tively at an early stage.

Overall, there is a clear trend in the financial and real estate market towards increasing sustain­ability require­ments on the part of regulators, investors, and society. This includes:

• Disclosure require­ments for corporate and investment practices
• Building emissions (and the corre­sponding stranded asset risk)
• Social respon­si­bility of companies in the form of corporate social respon­si­bility (CSR)
• Strategic topics, such as climate targets, and CO2 reduction paths at company, portfolio, and asset level
• Resource management require­ments (circular economy, biodi­versity, etc.)

Conclusion: Why ESG and sustainable finance?

ESG factors and regula­tions are becoming increas­ingly important in the financial industry and the real estate sector. This also applies (gradually) to the building stock in Switzerland.

ESG criteria and drivers as well as EU regula­tions such as the EU Taxonomy, SFDR, and CSRD are essential founda­tions for future sustainable finance.

ESG frame­works like the TCFD and CDP provide companies with clear guide­lines for the design, management, and disclosure of climate risks and oppor­tu­nities, as well as other ESG issues.

Early and proactive engagement: Targeted strategy devel­opment, imple­men­tation, and monitoring of key perfor­mance measures/indicators to enable long-term success.drivers and EU

In a world increas­ingly affected by climate change and social challenges, ESG and sustainable finance are of growing impor­tance in Europe and Switzerland. The intro­duction of non-financial reporting, disclosure, and trans­parency require­ments aims to make the economy more sustainable and encourage investment in environ­men­tally friendly projects (such as sustainable real estate).

The vast topic of ESG and SF harbors a multitude of defin­i­tions, frame­works, regula­tions, and guide­lines, but also many oppor­tu­nities for imple­men­tation. Invest­ments in real estate as well as its devel­opment and management must increas­ingly take into account environ­mental, social, and gover­nance factors in order to be considered “sustainable”.

Outlook: Regulatory devel­op­ments

The regulatory landscape surrounding ESG and sustainable finance is dynamic and constantly evolving, including stricter trans­parency and disclosure require­ments for companies and financial insti­tu­tions as well as their products. These include the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustain­ability Reporting Directive (CSRD). In Switzerland, too, the first steps towards greater trans­parency and sustain­ability have already been taken, and it is expected that further regula­tions will follow. Companies should therefore prepare for these changes in good time and actively engage with the new regula­tions.

How can we help?

Thanks to our extensive expertise in the fields of sustain­ability and ESG, we are at your side in these areas. We act as strategic advisors, calcu­lating carbon footprints and preparing in-depth ESG assess­ments for your properties to support the imple­men­tation of your sustain­ability goals. To do so, we rely on the vast knowledge and many years of experience of our sustain­ability experts. We also draw on extensive data through our in-house sustain­ability tools, such as Wüest Climate and our ESG rating. Our approach includes the sharing of specialist knowledge, whether through our Wüest Academy, public event series, or individual consul­ta­tions.

If you have any questions or sugges­tions on the topics mentioned in the blog post, please do not hesitate to contact us.

You might also be inter­ested in:

• Sustainable Finance: Challenges and Oppor­tu­nities for Banks
• Wüest Partner RE ESG-Rating estab­lishes itself in the financial industry
• Wüest Partner signs UN-supported principles for respon­sible investment

Related links:

• Sustainable Finance Switzerland report — Action areas 2022–2025 for a leading sustainable financial center
• Inter­na­tional Platform on Sustainable Finance
• FSB Task Force on Climate-related Financial Disclo­sures
• Swiss Sustainable Finance
• Finance Swiss
• Federal Office for the Environment: Climate and financial markets