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A green building does not make an ESG investment

With the EU's taxonomy regulation (see the article by Prof. Dr. Thomas Beyerle), there is no getting around for real estate companies and investors to consider ESG criteria. How do companies deal with this?

Sustainability is a pressing topic—also in the real estate industry and not only since the EU taxonomy. Instead of mere labeling, credibility is needed.Shutterstock, Miha Creative

No way around ESG criteria

In short: ESG combines the parameters environment, social (working conditions, health system, safety), governance (good corporate management). When real estate companies document their involvement with these criteria, they give investors the opportunity to make their decisions and investments in a sustainability-conscious manner. And the latest ESG Snapshot shows: more than 80 percent of the more than 100 market players in the real estate industry surveyed by EY Real Estate expect investors to increasingly demand for sustainable products in the future. Three quarters of the market players also stated that they believe that sustainable products will predominate the market in the future.

How to deal with sustainability risks?

The ESG criteria result in so-called sustainability risks, the management of which the German Federal Financial Supervisory Authority (BaFin) addresses in a fact sheet. Since March 10, 2021, all financial market participants have been required to transparently communicate how they deal with sustainability risks—which, according to BaFin, are “environmental, social or governance events or conditions, which if they occur have or may potentially have significant negative impacts on the assets, financial and earnings situation, or reputation of a supervised entity; this includes climate-related risks in the form of physical risks and transition risks (as a result of adjustment processes).” This is because such risks can reduce the value of real estate and thus reduce profitability. In the case of physical risks such as floods, this is immediately obvious. Transition risks arise, for example, because of adjustment processes during decarbonization due to the increase in the price of fossil fuels. Reputational risks affect the reputation of a company, primarily by neglecting the S and the G of ESG, for example due to a lack of occupational health and safety or as a result of criminal tax proceedings.

Corporate ESG image

“Environmental, social and governance factors have become an indispensable part of real estate management,” emphasizes Marco Kohla, Managing Director of GalCap Europe. That's why the real estate industry must quickly adapt to ESG requirements, Susanne Eickermann-Riepe, FRICS and Partner Real Estate Advisory at PricewaterhouseCoopers, is certain. In the future, not only investors but also the financial side will pay closer attention to the sustainability of a company and its portfolio.

For that purpose, last August, the Munich-based BVT Group introduced an ESG team to ensure the compliance at the company level and in investment decisions. “Taking ESG criteria into account is a consistent basis for our business policy, our investment decisions and our asset management. We have underlined the importance of these criteria by establishing the new committees and by consistently implementing them in our value creation process. To this end, we will formulate our ESG mission and an asset class-specific ESG investment policy for each division,” Tibor von Wiedebach-Nostitz, Managing Partner of BVT Holding, summarizes the current steps.

The Hahn Group was also able to publish its first Group Sustainability Report in December: “Not only do we want to intensify the dialog and report transparently, but also consistently integrate ESG criteria into the management of our retail property investment products. The challenges facing economic players are increasing rapidly, especially when it comes to environmental protection. The medium-term objective is to offer designated sustainability funds,” explains CEO Thomas Kuhlmann.

With its definition of sustainability, Catella Real Estate AG goes beyond a classic “labeling approach” and actively and consistently integrates sustainability into the company. “Sustainability is a cornerstone of our corporate culture. With our holistic approach, we make a positive contribution every day to a sustainably designed future,” Jürgen Werner, Member of the CREAG Management Board, is convinced. “Sustainability is all about credibility. Investors and other stakeholders quickly realize if there is a clear ESG strategy behind the statements,” says Werner.

Acceleration for industry developments

Thus, the representation of ESG criteria in everyday real estate ranges from monitoring consumption data (e.g., electricity, thermal energy, water, and waste) to classic due diligence in the acquisition process, which must be expanded to include sustainability aspects. Regulation is accelerating this development. However, not only legislators drive it, but also investors, stakeholders, and the public. To cite the words of Victor Hugo: “Nothing is more powerful than an idea whose time has come.”

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Stephanie von Keudell

Independent journalist

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