A green courtyard enhances the user experience in a building. Investors and occupiers alike value these ecological features, but are a few plants enough to serve as a sustainability indicator for a real estate investment? The guidelines set out in the EU regulations are intended to provide clarity.
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A regulated Climate

Taxonomy, Sustainable Finance Disclosure Regulation, the German Federal Climate Change Act: policy makers are imposing a whole range of regulatory measures on real estate companies to improve sustainability. While that causes uncertainty, it also offers opportunities. By Christian Hunziker

Property market professionals realised on 10 March 2021 at the latest that regulatory pressure for greater sustainability is more than just empty rhetoric. That was the date when the Sustainable Finance Disclosure Regulation entered into force, which obliges providers of financial products to inform investors about the sustainability of their products. 


The Sustainable Finance Disclosure Regulation (SFDR) is just one of several regulatory measures facing real estate companies. Even experts are finding the multitude of EU and national, state-level regulations to be a challenge. “It’s really not easy to keep up with the tide of regulatory measures,” says Christian Reibis of international auditing and tax advisory firm Baker Tilly. What is clear, is that all these regulatory initiatives stem from the Paris Agreement. On 12 December 2015, 197 countries committed to keeping global warming well below two degrees Celsius compared to pre-industrial levels. The EU Commission adopted its Action Plan on Sustainable Finance in 2018 to implement this goal. The plan aims to direct private capital towards investing in sustainability, thereby helping to achieve the below two degrees target.


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The EU taxonomy sets out when an investment can be considered sustainable

The central element of this action plan is the taxonomy laid down in an EU regulation. It specifies when an economic activity is ecologically sustainable and makes a significant contribution towards achieving environmental targets. That might sound simple, but as Reibis explains, the taxonomy is a “highly complex field” on closer inspection. The taxonomy defines six environmental targets, including the sustainable use of water and marine resources and the protection of ecosystems and biodiversity. Discussing the complexity of the regulations, Reibis cites the fact that “the delegated act on climate change mitigation and climate change adaptation alone runs to more than 500 pages.”


And there’s also another challenge. “Unfortunately, the measures are nt aligned with each other,” says Reibis’s colleague Martina Hertwig, who sits on the Executive Committee of the German Property Federation (Zentraler Immobilien Ausschuss, ZIA), Germany’s main real estate association. “For example, the taxonomy should have been finalised before the Sustainable Finance Disclosure Regulation, so that providers have certainty about the matters they need to report on."


This situation makes life very difficult for providers of funds and other financial products. “The new regulatory framework requires additional audit checks,” explains Christoph Holzmann, COO and Management Board member at Union Investment Real Estate. “We have only been able to assess a building’s conformity with the taxonomy since this year, because the taxonomy criteria only recently received final approval.”


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Proof of sustainability at property and portfolio level

Other real estate companies are likewise grappling with the question of how they should position themselves in view of the high level of uncertainty around ESG (environmental, social and governance issues). In a survey by Engel & Völkers Investment Consulting published in May 2021, 42 percent of the real estate companies questioned stated that the regulatory requirements were too vague.


One of the main concerns is how sustainability can be demonstrated at property and portfolio level. Martina Hertwig of Baker Tilly raises the question as to “whether data is available that makes it possible to compare properties in terms of their sustainability.”


There is an extra layer of complexity for international real estate companies, in that they need to comply with national legislation in addition to EU regulations. France, for example, has adopted comprehensive climate protection legislation that also affects the real estate industry, while Germany recently imposed stricter climate targets – the Federal Republic now intends to be climate neutral by 2045 (rather than 2050, as specified by the EU). A number of countries, including France, the United Kingdom and Germany, have also introduced country-specific CO2 pricing schemes, which impact the property sector as well. All these factors mean that sustainable, energy efficient buildings are set to become increasingly attractive. 


As long as there is a lack of clarity, the risk of greenwashing remains.
Christian Reibis, Accountant, Certified Tax Advisor, Partner, Baker Tilly

The influence of ESG on prices is still unclear

In Martina Hertwig’s view, it is debatable whether there are enough existing properties that meet ESG requirements. So will the price of sustainable real estate rise? “In an already tight real estate market, it’s difficult to predict whether buildings that meet the regulatory requirements of tomorrow will command a ‘green premium’,” says Christoph Holzmann. However, it’s highly likely that buildings which fail to meet those requirements will decline in value. A hefty 58 percent of the companies polled by Engel & Völkers Investment Consulting expect prices of non-ESG compliant properties to fall over the medium to long term.


Another issue that arises is whether the new regulatory regime will lead to an increase in ‘greenwashing’, i.e. products being made to appear more sustainable than they actually are. 


The fund classification system contained in the Disclosure Regulation is particularly problematic in this regard. “As long as there is a lack of clarity as to whether buying green electricity, for example, is a sufficient criterion for sustainability, the risk of greenwashing remains,” explains Christian Reibis of Baker Tilly. The Level 2 measures (implementing regulations) have not been adopted yet, so here again, there is a lack of coherence and alignment. 


Union Investment is therefore waiting for more clarity on the detailed aspects of Articles 8 and 9. Christoph Holzmann firmly believes that Article 9 should be restricted to financial products that “strive to make a real impact and are willing to accept higher risk or a lower return.” Fundamentally, Holzmann is convinced that transformation is essential and it offers “opportunities that we want to leverage in our capacity as an active international asset manager.”


By Christian Hunziker


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