2021 may go down in history as the year when environmental, social and governance (ESG) concerns took up permanent residence in the world of commercial real estate. Although the importance of sustainability reporting has been underlined by bodies such as the European Public Real Estate Association (EPRA) for several years, a combination of the pandemic’s lessons, environmental vectors and new EU legislation have helped crystallise its relevance in the public eye.
Yet a lack of formal guidance on the right way forward has repeatedly left the industry at an uncomfortable crossroads. Notes Patrick Kern, member of the sustainability team at Union Investment Real Estate GmbH: “As early as 2015, it was decided at the World Climate Conference in Paris that global warming should be limited to 1.5 degrees. However, a lack of concrete implementation plans or financial consequences have left the business world at a standstill.”
A recent report from Colliers highlights the fact that no single set of reporting frameworks has established itself as the accepted worldwide benchmark for ESG performance, making it extremely difficult for real estate investors to predict future requirements and liabilities. “The challenge at the moment is to understand what, exactly, needs to be done to calibrate property portfolios with the incoming requirements for decarbonisation in particular,” says Luke Dawson, MD capital markets EMEA at Colliers, highlighting that the potential cost of retrofitting existing buildings is estimated to be around €7 trillion in Europe alone.
EU directive on corporate sustainability reporting expected in 2023
However, last year’s enactment of the EU Action Plan on Sustainable Finance with the Disclosure Regulation (SDFR) has “shaken up the partly-dormant financial market”, Patrick Kern suggests. “By demanding more transparency on sustainability and even defining sustainability at European level, through the EU taxonomy mechanism, more clarity is emerging.”
Meanwhile, the EU’s Corporate Sustainability Reporting Directive (CSRD), due in 2023, is expected to take this to the next level by placing the onus on occupiers to provide key metrics. “Educating boards about the new responsibilities arising from emerging regulations will be a vital part of the transition,” suggests Andy Hay, managing director, EMEA property management at Colliers. “There will also be an increasing premium placed on ESG expertise, with more companies moving to hire specialists or seeking partnerships that boost their capabilities in this area.” Unsurprisingly, many real estate firms have already moved to appoint ESG officers this year in a bid to untangle the regulations and display leadership in this area. But while many firms are still supplicating policy makers to signal the road ahead, others see this as a poor excuse on the part of the industry.
If we achieve our carbon targets then our cost of debt will be lower.
Says Vasco Santos, global sales & leasing director for Ingka Centres: “The private sector has a huge role to play in ESG. Only relying on governments to make that happen is not a fair expectation. We need to bring other partners together and be at the forefront of this movement.” Ingka is targeting a 100 percent use of renewable energy by 2025, and 100 percent renewable sources for heating and cooling by 2030. Its social approach includes giving more people access to jobs at its centres, upskilling competences and creating a community ecosystem around its properties. “We don’t believe there needs to be a trade-off between sustainability and growth,” he underlines. Other companies are making a balance sheet commitment to sustainability by linking the cost of their debt to their environmental performance. Canada’s Ivanhoé Cambridge is one such firm, having recently unveiled plans to convert its corporate programme of term loans and lines of credit – amounting to some C$8.5 billion (€5.92 billion) – by indexing the debt to its ESG performance. “If we achieve our carbon targets then our cost of debt will be lower,” explains vice president of corporate social responsibility (CSR) Stéphane Villemain.
Digital technology supports sustainability strategies
Finally, as efforts to decarbonise the real estate sector continue to gather momentum, proptech solutions that help developers and landlords improve their sustainability credentials are increasingly valuable. In 2021, NREP raised some €268 million from investors including Norwegian state’s climate investment company Nysnø, Credit Suisse, BMW Foundation, Woven Capital and other backers to invest in technologies related to sustainable property development. From tools collecting data – the basis of any green improvement strategy – to state-of-the-art building materials, it seems that industry initiative may yet plot the way out of potential crisis.
By Isobel Lee