How ESG impacts Real Estate Investment Decisions

Both investors and property developers need to evaluate the impact of ESG criteria on their business. Which environmental, social, and corporate governance criteria (ESG criteria) must sustainable funds meet? Until now, it’s not clearly defined. The EU’s standardised classification system aims to change this, focusing primarily on ecological aspects – the E in ESG. The specific goals: to reduce CO2 emissions by at least 80 per cent and final energy consumption by 50 per cent by 2050.

In addition to pressure from their stakeholders and the public, ESG regulations now also come into play. These regulations compel investors to allocate their funds in accordance with ESG criteria. Additionally, private investors’ interest in sustainable properties is increasing significantly. Both private and institutional investors are driving the change.

While investors are most affected by these regulations, they do not contribute operationally to meeting the ESG criteria for real estate. This responsibility falls primarily on property developers and builders, as there can be no sustainable property funds without sustainable property projects. The consequence: without sustainable property projects, there will be no investors in the future.

What “Sustainable” Means for the EU

When are properties considered sustainable? To attract investors, your properties must meet the prescribed ESG criteria. The EU has set six ecological goals, which have a significant impact on the real estate sector due to its high energy consumption and reliance on fossil fuels:

• Climate protection
• Adaptation to climate change
• Sustainable use and protection of water and marine resources
• Transition to a circular economy, waste prevention, and recycling
• Prevention and reduction of environmental pollution
• Protection of healthy ecosystems

A property is deemed sustainable if it makes a substantial contribution to at least one of the ecological goals and does not harm any of the others. For the real estate sector, three goals are particularly relevant: climate protection, adaptation to climate change, and the transition to a circular economy, waste prevention, and recycling. If you use recyclable building materials in your project planning and construction, and ensure energy supply from renewable sources, you are on the right track to fulfilling the ecological part of the ESG criteria for your property.

Meeting ESG Criteria and Attracting Long-Term Investors

How do investors assess the sustainability of your properties? Rating results, such as the GRESB standard, and building certifications make it easier for investors to compare “green” portfolios and ESG performance of construction companies. Social and governance strategies are also becoming increasingly important to investors. Therefore, it makes sense to engage with ESG early and comprehensively, integrate ESG criteria into your corporate strategy, and translate them into concrete measures.

Ignoring is Not an Option

With the ESG regulations coming into force for the real estate sector from March 2021, there is no way around it: ESG criteria are an integral part of property strategy. This initially leads to additional effort but pays off in the long run towards your set return goals. Positive ESG criteria will become a central investment parameter in the future. A negative rating could, on the other hand, devalue properties or even lead to sanctions, as has already been legally established in other countries. Sanctions could actually endanger your return goals. Therefore, ignoring is not an option.

• Presentation based on Deloitte’s impact/contribution matrix from the following article: ESG in the real estate industry – What does EU regulation mean for real estate players?
• Presentation based on Assiduus’s illustration from the following article: Developing real estate responsibly, investing sustainably.