ESG – Sustainability in the real estate industry
Sustainable into the future
The sustainability theme has been firmly anchored in our society for years, and the real estate industry is no exception. ESG ratings are becoming increasingly important in this context. These provide information on how sustainable a company or a financial product is, among others. However, ESG criteria go far beyond the sustainability aspect. They not only cover ecological aspects, but also provide incentives for companies and fund managers to uphold other ethical and social values.
What does ESG stand for?
As part of corporate social responsibility, ESG is a voluntary contribution by business to sustainable development. This contribution goes beyond the legal requirements and covers the environmental, social and corporate governance areas of responsibility. With a steadily increasing awareness of sustainability and business ethics in our society, it is important for an increasing number of investors to invest in companies and funds that also represent these values.
Meaning of the ESG criteria
Sustainability as well as social justice and conscientious corporate governance are important topics that should be developed with a focus on the future. But ESG regulations are also economically worthwhile: Not only has sustainability become a top trend in recent years, but other ESG characteristics, such as diversity among employees, have a positive impact on a company’s financial success, according to numerous studies conducted in recent years. This in turn has a positive impact on the number of investors. Companies therefore benefit from an ESG strategy just as much as investors do. But what exactly constitutes these criteria?
The environmental aspect of the ESG approach is intended to encourage greater sustainability in business. It includes components such as climate protection, resource management, water and biodiversity conservation. In the real estate market, for example, climate-neutral buildings, environmentally friendly, energy-efficient building management, green spaces on properties, sustainable wastewater disposal and the general minimization of negative ecological impacts of properties and companies are viewed positively.
Social criteria support the ESG goals of social justice and include company activities that entail social consequences. They focus primarily on respect for human dignity and fair working conditions for all stakeholders. Some measures can also be taken to protect non-company individuals. In the real estate industry in particular, it is important to keep an eye on the social impact of one’s own products: such as the construction of social housing, development of municipal infrastructure or accessibility.
Corporate governance and supervisory structures
The criteria of corporate governance, like the social aspect, relates to the ethical behavior of the company. However, it focuses primarily on economic processes and their impact on the company and society. The values of transparency and fairness are particularly important here: targeted action against corruption, equal opportunities and the independence of supervisory boards, for example, are intended to protect them.
How have ESG regulations evolved?
Socially responsible investing (SRI) started in the 1960s. Investors initially withdrew from their portfolios shares in companies or entire industries whose business activities they considered morally reprehensible.
The foundation for the widespread use of ESG criteria today was established by the United Nations Principles for Responsible Investment (PRI), launched in 2006. By signing the PRI, companies commit to incorporating ESG factors into their strategy. As of March 2021, the initiative recorded signatures from more than 3,800 companies worldwide.
In spring 2021, parts of the EU’s Sustainable Finance Action Plan also came into force. This means that for the first time there are legally defined, binding ESG criteria for funds and companies that wish to describe themselves as ESG-compliant.
Responsibility for sustainable development on a social, economic and ecological level
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.