ESG – Sustainability in the real estate industry

With regard to real estate, ESG criteria are particularly relevant for new buildings and renovations as well as for the purchase of properties. In order to occupy a good place in ESG rankings, it is not only important to optimize new buildings; existing properties should also be renovated.

Currently, the focus on the real estate market is still strongly on the ESG aspect of the environment. In order for a property to be considered environmentally and resource friendly, there are some specific criteria that must be met. The primary energy demand of the property should be in the top 15 percent of the local real estate market. However, this aspect is often difficult to verify, as the values of other properties in the vicinity are usually not visible. Instead, the rating on the energy certificate can be consulted. Here, the energy consumption must be rated with an A, or the A rating must be achieved with the help of a refurbishment within three years. Another option in the course of a refurbishment is to reduce the primary energy demand by at least 30 percent within three years. With regard to the other criteria, there are no such clear guidelines, but investors in particular are increasingly demanding evidence that certain social and governance aspects are being taken into account. 

One way of providing this evidence is through ESG ratings. For these, the ESG conformity of objects, companies and financial products is evaluated on the basis of defined categories in order to make them measurable and enable a comparison. There are now many different rating methods, most of which are offered and carried out by agencies. One example is ECORE scoring, which was created in 2020 by the industry initiative ECORE (ESG – Circle of Real Estate) specifically for the real estate market. This is a scoring system that is divided into three areas: governance, consumption and emissions, and asset check. For the evaluation, all regulations, ordinances, laws and existing certificates such as DGNB, BREEAM or LEED are queried around the ESG criteria. The ranking is based on a point scale between zero and 100 – the more points earned, the better the ESG rating.

Learn more about the RE ESG Rating from Wüest Partner.

ESG investing is investing money where investors strongly incorporate ESG criteria into their decisions. However, there is no one ESG strategy. Investors predominantly compare the ESG ratings of different investment properties to decide on one of them. Where exactly the line is drawn between ESG-compliant and non-ESG-compliant, however, is something everyone must decide for themselves.

Grundlegend gibt es keine ESG-Verordnung, welche zur Befolgung der Kriterien verpflichtet. Einigen Teilnehmenden des Finanzmarktes obliegt jedoch die Pflicht, darüber Auskunft zu geben, inwiefern sie die ESG-Kriterien befolgen. Seit 2017 müssen börsennotierte Unternehmen mit mehr als 500 Beschäftigten in Deutschland über ihre Tätigkeiten in nicht finanziellen Umwelt-, Arbeitnehmer- und Sozialbelangen, zur Achtung der Menschenrechte sowie zur Bekämpfung von Korruption und Bestechung Bericht erstatten.  

The European Disclosure Regulation and Taxonomy Regulation, which came into force in March 2021, further expands the range of financial market participants who must report on their compliance with ESG factors. A major criticism of the regulation at the time was that it was very vaguely worded. Many sectors, including the real estate industry, found it difficult to adjust to the new regulations, because in some cases the criteria that buildings, for example, would have to comply with in the future were not even known. However, the EU has now presented technical evaluation criteria for the Taxonomy Regulation (TSC), which specify the previous regulations and are to come into force at the beginning of 2022.