How do CSRD & SFDR Impact the Real Estate Industry?

Sustainability for Corporates: CSRD

The Corporate Sustainability Reporting Directive (CSRD) is a legislative proposal by the European Commission aimed at increasing transparency and consistency in sustainability reporting by large companies in the EU.

The CSRD replaces the Non-Financial Reporting Directive (NFRD). The former required large, publicly traded companies to report how their business model impacts their sustainability. With the CSRD, companies must now also report on how external sustainability factors (e.g., climate change or social factors) influence their activities, enabling investors to have a clear understanding of an asset’s sustainability. Against this backdrop, the CSRD demands more detailed reporting, obliging larger companies, including real estate firms, to disclose information on social and governance issues.

The replacement of the NFRD by the CSRD not only expands the scope of sustainability reporting but also increases the number of companies subject to reporting. Affected companies include all large or publicly traded firms that meet the following criteria:

• More than 250 employees

• More than €20 million in assets or

• More than €40 million in annual turnover (net)

The directive will be implemented in stages:

• Companies already subject to the NFRD: First reporting in 2025 for the 2024 financial year
• Large companies not currently subject to the NFRD: First reporting in 2026 for the 2025 financial year
• Listed SMEs: First reporting in 2027 for the 2026 financial year

Who is subject to the NFRD? Since 2017, companies with more than 500 employees, as well as insurance and banking institutions, have been required to report**.**

The Impact on the Real Estate Industry

The impact of the CSRD on the real estate industry depends on the specific requirements and implementation. What is certain is that the law will require real estate companies to disclose their activities across all three ESG levels: Environmental, Social, and Governance. There are three main positive effects for the industry:

• The CSRD reporting standards will be relevant for all EU legislation, including the EU Taxonomy and the SFDR. For companies required to report, this is a step towards unified reporting requirements and international comparability.
• Ideally, the CSRD will promote the sector’s sustainability and help investors make more informed decisions.
• Increased transparency and comparability of sustainability criteria could also lead to a better market position for companies with strong ESG performance and lower capital costs for sustainable real estate investments.

Sustainability at the Product Level: SFDR

The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation that affects financial market participants and real estate investment funds. The goal is to increase the sustainability of financial products and create transparency. Since March 2021, affected companies must disclose information about their sustainability policies, the integration of sustainability risks in their investment decisions, and the environmental and social impacts of their investments. Additionally, on 1 January 2023, the so-called Level 2 regulation came into force, detailing criteria for disclosed metrics.

The SFDR has several consequences for the real estate industry, including:

• Increased Transparency: The SFDR requires real estate investment funds to provide more detailed information about their sustainability policies, investment decisions, and environmental and social impacts. This will help investors make more informed investment decisions.
• Standardised Reporting: The SFDR aims to standardise sustainability reporting in the EU with a common framework. Standards and benchmarks simplify the reporting process and make it easier for investors to compare the sustainability of different investment funds.
• Focus on Sustainability Risks: The SFDR requires real estate investment funds to consider the environmental, social, and governance risks associated with their investments. The regulatory framework can lead to a higher prioritisation of sustainability in investment decisions and encourage the industry to proactively address these risks.

Overall, the SFDR is likely to have a positive impact on the real estate industry by promoting greater transparency, standardisation, and a focus on sustainability – especially at the product level. Consequently, fund managers may need to make significant changes to their reporting practices and investment processes.

How are CSRD and SFDR Connected?

As mentioned above, both the SFDR and CSRD are EU regulations aimed at improving transparency and disclosure of sustainability criteria. While the directives address the corporate and product levels, respectively, and affect different types of companies, they are closely linked regarding sustainability reporting in real estate companies.

Real estate companies subject to both the SFDR and the CSRD must integrate SFDR requirements on sustainability risks and impacts into their CSRD reporting. This means the company must disclose how it identifies, assesses, and manages sustainability risks and impacts, and how these factors are integrated into its decision-making processes. The sustainability report must therefore be aligned across both regulatory frameworks.

What Lies Ahead for the Industry

The multitude of regulatory requirements is a challenge for the industry, which is still at the beginning of the ESG transformation. It is crucial to actively engage with these issues and start collecting data immediately. Understanding the motivations behind the regulations reveals that achieving a 100% solution is not the goal. Rather, it is about focusing on sustainability and creating transparency. Transparency also means openly communicating when certain sustainability goals have not yet been reached or are still in progress.

The ESG transformation offers real estate companies the opportunity to stand out from the competition through early action and increase the value of their assets with strong ESG performance. Two foundational elements are crucial on this path: a long-term ESG strategy that considers sustainability risks and opportunities as well as the impact of corporate activities on the environment sets the course for further measures. The second element is intelligent data management, which simplifies the collection, analysis, and reporting of data. Whether a company needs to report according to SFDR, CSRD, or not at all: ESG is here to stay, and every real estate company must engage with ESG criteria and data. At Alasco, we believe that the regulations are already complex enough – data management doesn’t need to be as well.