E, S & G - AND WHAT'S BEHIND THEM


The orientation towards the dimensions of environment, social affairs and responsible governance is responsible for the real estate industry settingitself on a new, sustainable footing.

Sustainability, decarbonisation, ESG - the real estate industry seems to have finally recognised the signs of the times. Europe and companies with leadership quality are leading the way - partly out of conviction and partly driven by internal and external pressure. The ESG challenge is also becoming a brand challenge.


The world is in crisis mode. The pandemic was followed by the Russian invasion of Ukraine with all its global consequences for people and the economy - and the pandemic is far from over. What is often forgotten is what can be seen as a global crisis before and after: the climate crisis. According to unanimous expert opinion, massive upheavals and adjustments to completely new framework conditions are to be expected, on a scale that many people may still be suppressing. The construction and real estate industry, which according to Eurostat is responsible for up to 40 percent of global CO2 emissions, is the focus of attention. Sustainable measures are required and the defining issue of the future, which should actually be one of the present, is ESG. 

Three letters for a new world
The abbreviation ESG symbolises an orientation towards the dimensions environment, social and responsible corporate governance. The "E" for environment stands for environmental pollution or hazards, greenhouse gas emissions or energy efficiency issues, for example. It is about the interaction between business and nature. Companies are able to have both a positive and a negative impact on climate, resources, water and biodiversity through their products, services and value chains. The most essential criteria are the efficient and responsible use of limited resources, sustainable energy management, the disposal of raw materials and wastewater, and overall the reduction of the ecological footprint. Social ("S") includes aspects such as occupational safety and employee protection, diversity or social commitment. The added value that the company brings to society is taken into account. This includes ethical aspects such as respect for human rights and human dignity or the social impact of products and services on society. Finally, governance ("G") is understood as sustainable corporate management that promotes internal management and control processes and values in order to prevent risks. Working conditions, anti-corruption measures, tax honesty or the fight against anti-competitive practices are considered as partly overlapping criteria with the S for Social.

Elements of sustainable investment
In recent years, the term ESG has established itself as a standard for sustainable investments, especially in the financial sector. The reorientation of the financial system is necessary if only to be able to implement the climate protection measures agreed under the Paris Agreement. However, according to ESG, the capital flows must also be brought into line with the social aspect and the type of corporate governance. From the point of view of fund companies that want to present sustainable companies in their portfolio, it is therefore a matter of responsible investing. The basis for this action is an integrative sustainability concept, which today contains three essential elements. 

In recent years, the term ESG has established itself as the standard for sustainable investments, especially in the financial sector. The total volumeof sustainable real estate investments is reaching new record levels every year.

The first step is to consider so-called negative criteria. The starting point of a sustainable investment policy is the basic ethical stance of "avoiding involvement for the worse". By avoiding controversial business areas and practices, a fundamental morally responsible position is taken and (reputational) risks associated with major financial implications are avoided. The exclusion can refer to certain business areas as well as to companies and states (local authorities) that do not comply with predefined criteria. If a company or a local authority violates a negative criterion (e.g. child labour, production of nuclear energy, production or extraction of coal, food speculation, activities with "outlawed weapons" such as land mines, chemical or biological weapons, particularly high state arms budgets ...), it should not be considered in the investment universe for sustainable funds.

The second element is the best-in-class principle, the "cooperation for the good". Here, special attention is paid to the integration of ESG research in the company valuation and thus the stock selection. In concrete terms, best-in-class means investing in companies that have a better ESG rating than the average of companies in the same industry. The focus is on maximising the ESG score, i.e. the assessment of companies in terms of their comprehensive sustainability performance. This is based on the approach that good long-term corporate performance is only possible on the basis of sustainability in practice.




The third element goes a decisive step further. Even more than in the determination of negative criteria and the best-in-class approach, emphasis is placed here on actively exerting a positive influence on the behaviour of companies, organisations and also consumers. For a fund company, this includes proactive company dialogue and exercising voting rights at shareholder meetings. If it succeeds in leading companies to more transparency or to a change in strategy in the sense of more sustainability, the commitment has achieved its goal. This is because the indirect contribution to improving the credit rating and performance of companies leads to a "double dividend" and thus ultimately benefits the investors who invest in the sustainability of the world and thereby achieve attractive returns.

Disclosed instead of secretly
The EU is trying to put a stop to the practice of greenwashing - i.e. the particularly environmentally and responsibly conscious presentation without there being a sufficient basis for it - with the disclosure regulation EU 2019/2088. Thus, three categories were introduced by the EU for financial products. The classification under Article 9, the strictest category, concerns the investments known in technical jargon as impact products. What is required here is a clear intention to achieve a positive social impact, as well as the quantification and evaluation of the intended goal (for example: the reduction of CO2 emissions or the creation of affordable housing). For market participants with investment products in the area of sustainability, a comprehensive information obligation applies in the course of this. Among other things, they must publish and keep up-to-date information on their website, describe the sustainable investment objective and provide information on the methods used to assess, measure and monitor the impact. This includes information on data sources, asset valuation criteria and sustainability indicators used to measure impact. Furthermore, the regulation requires that the information to be disclosed must be clear, concise and understandable for investors. It must be published in a precise, fair, clear, non-misleading, simple and concise form and in a clearly visible and easily accessible place on the website. 

The practice of greenwashing is not only put a stop to by the disclosure regulation EU 2019/2088. Stakeholder pressure also means that it is no longerpossible to pretend to be sustainable with marketing tools alone.


ESG as a risk factor for real estate players?
The fact that the new ESG rules not only bring desirable but also problematic aspects for real estate players is a finding of a recent study that for the first time looked at the effects and risk factors in ESG implementation on the reputation and business models of real estate companies. The Real Estate Brand Institute, REB.Institute, in cooperation with Biberach University of Applied Sciences and Union Investment, evaluated a survey of 117 real estate experts in Germany in spring 2022. The most important results: The regulatory requirements for ESG harbour immense risks of misinterpretation for real estate players. At the same time, the disclosure regulation is reflected in significant delays in the acquisition process. 

In addition to the risks of misinterpretation and the consequences for investment behaviour, the study identifies the two central obstacles to consistent ESG implementation in companies as the overall higher administrative burden (37 percent of respondents) and the higher cost burden (30 percent of respondents). According to the study, the answer to the rising costs could lie in improved and digitalised processes that lead to efficiency increases in purchasing and inventory management. The second major field of action identified by the study is the organisational positioning of ESG. At present, responsibility for organisational implementation in real estate companies is widely distributed among ESG departments, various working groups, external consultants and management or the board. The urgency of the issue is likely to make ESG increasingly a top priority. The clear majority of the study respondents (60 per cent) see ESG implementation as a central steering task of top management. 

For Jan von Mallinckrodt, Head of Sustainability at Union Investment Real Estate, the study primarily highlights a dichotomy between goodwill and implementation hurdles: "The current regulatory requirements with regard to the real estate industry's efforts to achieve the 1.5 degree path are rated as inadequate by almost 60 per cent of the experts surveyed. What in principle enjoys broad acceptance in the industry cannot release the necessary energy due to many still unresolved questions. At the same time, 'wait and see' cannot be the right motto. The pressure to act remains extremely high." 

The new EU regulations in connection with ESG also harbour risks of misinterpretation for real estate players. At the same time, according to thestudy „Risk factor ESG?“, the EU disclosure regulation is reflected in significant delays in the purchasing process.


The central key
Thomas Beyerle, professor at Biberach University of Applied Sciences, addresses the economic pressure to act as follows: "In the future, the solution competence of the providers in the area of consulting around the regulatory requirements will determine how competitive and sustainable a business model is in the real estate industry.“ According to Beyerle, demands and pressure come from outside as well as from within, above all from investment partners and institutional investors, but increasingly also from the public and the media as well as from the company's own employees. It is obvious that the pressure also offers a great opportunity - and this is also how many of the companies surveyed in the study see it. For example, 29 per cent see the consistent implementation of ESG as a positioning opportunity vis-à-vis the competition. The real estate companies also see opportunities in terms of better financing conditions for ESG-compliant properties (17 percent) and higher employee satisfaction (14 percent). "It is gratifying that economic earnings potential is seen in the topic of ESG - even if only in its infancy. This is in line with our expectation that sustainability will increasingly be reflected in property valuation," says Jan von Mallinckrodt. For Harald Steiner, CEO of the European Real Estate Brand Institute, REB.Institute, the study has made one thing clear above all: "It confirms our recent empirical market observations: ESG has been the strongest driver with the greatest influence on the positioning and reputation of corporate brands since this year. ESG is thus becoming the central key to success and growth for real estate players from all sub-sectors of the industry."

The CO2 Challenge
What is needed now from the actors and all those responsible is tangible action. In the real estate industry, this concerns above all the immanent issue of decarbonisation. "Transforming the built environment in a sustainable and responsible way requires not only a change in the criteria for assessing the return on invested capital, but a change in mentality. If organisations do not recognise this, their other stakeholders - their investors, their customers and their employees - will. Therein lies the risk of not adapting to climate risk now," says Guy Grainger, Global Head of Sustainability Services and ESG at JLL. JLL analyses in its global study "The Carbon Challenge - Decarbonising the Real Estate Industry". According to the study authors, this decade is seen as a turning point in the decarbonisation of real estate. Investors, occupiers and most companies have set ambitious net zero targets for 2030 or even earlier. The pandemic has acted as a wake-up call for environmental and social responsibility that will require the real estate world to make complex changes in an area critical to the industry. Leaders in business and investment are taking their own initiatives and making changes primarily because they firmly believe it is the 'right thing to do' for their stakeholders - employees, clients, investors, communities and the planet - not because they are obliged to do so. Inaction is no longer an option for leaders.

Experts are convinced that it is not possible to simply "build our way out" of the problems ahead. What matters most in the transition to a low-carbon economy is the retooling of the existing stock. Data is the biggest catalyst for green progress, according to the JLL study. To reach net-zero targets faster, forward-thinking companies now realise that improved use of technology and data for smart buildings and energy monitoring will play an indispensable role.


The European target is clearly formulated. According to experts, the next decades are seen as a turning point in the decarbonisation of real estate. Investors, occupiers and most companies have set ambitious net-zero targets. The pandemic has acted as a wake-up call for environmental and social responsibility, requiring the real estate world to make complex changes in a critical area for the industry.


Climate Neutral Real Estate Europe
The path is being driven forward at the pan-European level. According to the EU Commission's proposal from the end of 2021, energy performance regulations for buildings will be brought in line with the European Green Deal to decarbonise the EU's building stock by 2050. Funding will be provided for initiatives to renovate homes, schools, hospitals, offices and other buildings across Europe to reduce greenhouse gas emissions and energy costs and improve the quality of life for millions of people. "Promoting the renovation of homes and other buildings supports economic recovery and creates new job opportunities. In addition, energy renovations lead to lower energy bills and the investments eventually pay off. We aim to increase the rate of energy renovations across the EU by targeting barriers to renovation and providing financial support for the upfront investment required. Focusing on the buildings with the worst energy performance prioritises the most cost-effective renovations and helps to fight energy poverty," explains Executive Vice-President Frans Timmermans, who is responsible for the European Green Deal - and is supported by EU Commissioner for Energy Kadri Simson: "Buildings are the biggest energy consumer in Europe - they consume 40 percent of our energy and cause 36 percent of our greenhouse gas emissions. This is because most buildings in the EU are not energy efficient and are still predominantly powered by fossil fuels. We need to do something about this urgently, as more than 85 per cent of today's buildings will still be standing in 2050, when Europe needs to be carbon neutral." Improving our homes is also an effective response to high energy prices, he said: "The buildings with the worst energy performance in the EU consume many times more energy than new or professionally renovated buildings. And it is often the most vulnerable people who live in the least energy efficient homes and therefore struggle to pay the bills. Renovations reduce the energy footprint of buildings, lowering energy costs for households while boosting economic activity and job creation."

The Commission proposes that all new buildings must be zero-emission buildings from 2030. To realise the potential through faster action in the public sector, all new public buildings must be zero-emission from 2027. This means that buildings must consume little energy, be fully powered by renewable energy, emit no CO2 from fossil fuels on site, and have their global warming potential indicated in their energy performance certificate based on their life-cycle emissions.

The ESG criteria put their stamp on the companies in the industry - and vice versa. Those who succeed in positioning their corporate brand correctlyin the ESG environment will lead the way as market leaders.


The Brand Challenge
It goes without saying that the sustainable transformation is an enormous challenge for the brand ambassadors of companies in the industry. "The focus should be on the added value that can be achieved by building a stringent, cross-stakeholder brand that is appropriate to the topic," says REB.Institute CEO Harald Steiner. Those who use marketing, brand management and brand to credibly and authentically convey that they are following the path of sustainability in all aspects will be among the winners - because in the long term, this will win the trust of partners, customers and investors as well as that of the general public and political decision-makers. According to Steiner, the brand aspect is of decisive relevance: "The way companies deal with the issue of ESG internally and externally makes a decisive contribution to their future position on the market and how the corporate brand develops in competition. A convincing ESG business card, which is reflected in the brand, also becomes a prerequisite for buying an entry ticket for the capital market - and thus for securing the future of one's own company."  (CL)

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