Taxonomy and new regulations
As the second largest CO2 emitter in Switzerland, the real estate sector is accelerating its efforts to adopt a more sustainable approach to their operations, with intention to be more accountable for their impact.
Aligned with the European drive for sustainable finance, Berne is aiming for climate neutrality by 2050. The European Union adopted its taxonomy on green activities in 2020. Today, the Swiss real estate sector is under pressure from the Swiss authorities, banks and investment funds, to bring themselves up to speed in order to integrate environmental, social and governance (ESG) criteria.
The first part of the European regulation on taxonomy aims to boost green investments and limit the risks of “greenwashing”. This reference framework provides criteria for labelling economic and ecological activities that enable climate change mitigation and adaptation. It also enables companies to meet the new European ESG reporting obligations (disclosure regulation applicable in March 2021). For the time being, these obligations apply to European companies with over 500 employees and a turnover of more than 100 million euros. The taxonomy is to be completed by the end of the year for the criteria of pollution, circular economy, biodiversity and protection of water resources.
Although the mandatory guidelines for reporting are less stringent in Switzerland than in the European Union, for local and foreign investors, as well as property management companies, the inclusion of ESG criteria has become crucial to remain competitive. Not to mention the impact of the carbon tax on fossil fuels that applies to Swiss real estate.
After transport, real estate emits the largest amount of greenhouse gases in Switzerland, accounting for nearly 30% of total CO2 emissions. The real estate sector is therefore one of the pillars of the Swiss Confederation’s climate strategy, in line with the objectives of the Paris Agreement. According to the Swiss Federal Office of Energy, buildings account for 45% of the country’s final energy consumption, 75% of which is caused by heating (mainly oil and natural gas). The industry is also responsible to ensure good practices in terms of waste management, recycling of materials, insulation, pollution, water consumption and biodiversity. Increasingly, it must take into account the grey energy of buildings.
Besides targeting climate and environment factors, the requirements also extend to societal performance and governance, including the enhancement of social mix in housing, accessibility for the disabled, mitigation of corruption, transparency, and communication.
How to take these ESG criteria into account? What are the challenges? “The major problem with ESG ratings is data collection. There are a lot of criteria, in many different areas. Thus, it is often tedious, time-consuming and costly for investment funds or property owners to do this work and then implement a rating,” says François-Xavier Favre, manager specialising in portfolio valuation and sustainability issues at Wüest Partner’s Geneva office.
Wüest Partner draws on a large database of economic and geospatial data covering Switzerland and European Union countries to, almost automatically, collect a large amount of information using applications and teams of real estate developers/experts. This collection of data provides details on the location characteristics of a building, the brightness of a site, the proximity of shops, schools, commercial and public services, etc. CO2 emissions are calculated, for example, using Wüest Climate, an application developed by Wüest Partner as part of the Swiss real estate portfolio compatibility tests (PACTA test) on behalf of the FOEN. Experts then complement this work with technical site visits and interviews with owners. In the area of governance, for example, the question is whether an insurance company with a property fund could have active tenants in areas where exclusion criteria exist, such as tobacco, alcohol or coal.
“Another important issue is the standardisation of criteria. Many ratings have been developed, but they are not necessarily ESG in the sense that they only focus on the environmental part of the building,” says François-Xavier Favre. “Hence Wüest Partner’s approach to developing a balanced rating for the real estate sector takes all three letters of ESG, namely environmental, social and governance, into account equally.” To a certain extent, the rating is also intended to be compatible with certain international standards, such as the GRESB (Global Real Estate Sustainability Benchmark), “up to 60-70%”, says Wüest Partner. With an international presence, Wüest Partner has just launched a model for calculating CO2 emissions from buildings in Germany, in accordance with European standards (internationalisation of the model) and taking into account the fact that a large proportion of electricity production is still based on coal. In Switzerland, where a large part of the electricity is produced by dams (2/3 hydro, 1/3 nuclear), the associated CO2 emission coefficient is almost neutral. In Italy and France, where it is developing, Wüest Partner is now able to replicate and adjust such a model.
Reconciling sustainability and profitability
Can the Swiss real estate sector be sustainable and responsible? Yes, provided that it takes a long-term view of its strategy and the ESG effectiveness of its assets, i.e. assesses its environmental, societal and governance performance, communicates and builds transparent, consistent and annualised reporting, and ultimately improves. Wüest Partner does not simply carry out an ESG rating, but also assists real estate fund managers, investors and owners in their ESG reporting and strategy over a five to ten year horizon.
“Today, we see buildings that are very poor in terms of energy and, in general, meeting the ESG criteria. This does not mean that they should be sold! It is entirely possible to improve the environmental and social performance, the sustainability and, ultimately, the rating of these buildings. In addition to the ESG rating, we advise investors on how to proceed with making the right improvements while keeping in mind the economic development of the building. In the past, property owners have often found it ineffective to undertake energy renovations because they thought it was too expensive and that the extra cost would not affect the property or market value of the building. But what we show, through our analyses of portfolios and projects, is that an energy renovation often results in a financial increase in the value of the building (3 Winners study (german)), due to various parameters such as the current rent level versus the market, associated charges, cantonal subsidies, CO2 taxes, etc.,” points out François-Xavier Favre.