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The marathon continues

ESG and SRI: why the real estate industry would do well to take a proactive approach to these topics

Bad weather front on the real estate niche? At least that’s probably the opinion of those who have so far preferred to stoically refer to the wide field of ambiguities instead of taking action. The EU Action Plan on Sustainable Finance is putting pressure on the industry with a uniform classification system—but social responsibility and property returns are in no way mutually exclusive.

ESG environmental social governance business strategy investing concept.Shutterstock, SWKStock

The timid revolution

SRI (Socially Responsible Investment), i. e. the responsible approach to investing capital—the explanation of the three letters seems so simple. But they describe nothing less than the development steps of the so-called sustainability revolution. True, evolution sounds friendlier, especially as the beginning of CSR activities was still characterized by a high degree of voluntarism, vanguard, and few standards. However, action continues to be too hesitant and—apart from the real estate certificates and GRI reporting standards—too much characterized by a high degree of individual singular, local, company or property-specific initiatives.

Real estate niche on dangerous grounds

However, since the end of March, this has come to an end in an almost revolutionary act: with the EU Action Plan on Sustainable Finance, better known as the “Taxonomy” (Regulation (EU) 2020/852), the parameters for real estate investors or their fund companies will shift tectonically. Superficially, this without doubt describes a new level of increased administrative activity and risk provisioning, which readily leads to immediate grumbling and lobbying behind the scenes. However, what is meant is nothing less than a completely new way of thinking for real estate companies with the main goal of redirecting capital flows to sustainable investments. Reading on, it soon becomes clear: in the more or less comfortable, because autonomous “real estate niche” of recent years, it is becoming increasingly uncomfortable, because the capital market requirements are turning out to be a vortex taking everything in assets with it.

Looking at the catalog of measures—for example, measure 1: the introduction of an EU classification system for sustainable activities; measure 2: standards and labels for environmentally friendly financial products; or measure 3: the promotion of investments in sustainable projects—it becomes clear in the self-reflection that the portfolio holders’ excuse regarding a long-term transformation towards green is on an increasingly thin level of argumentation. In brief: no capital without documentation, implementation and reporting of the requirements described above! And: the dynamic launch of “green” real estate funds will not be enough in the long run.

Social responsibility vs property returns?

The pressure on the industry is increasing because the successful resistance of the past with the goal to go an own way in the industry is catching up with us—while we can continue to point to a wide area of ambiguity. For example, so far, real estate funds are excluded from the ECO label of the EU action plan and lack a translation as well as benchmarks to define the product positioning as required by regulations (“Basic”, “ESG Strategy”, “Impact”). Also, the ESG systematics for real estate portfolios has not yet been defined and is currently not (yet) the focus of the taxonomy, but it is particularly relevant for institutional multi-asset investors. And all of that with the objective of a manageable tool for deriving measures that serve to improve the portfolio CO2 footprint. To be clear: after ten years of “practicing”, the entrepreneurial voluntariness is coming to an end, the measurability and benchmarking of the measures, malus bonus included, is increasing.

Dramatically put: those who do not want to miss this development should embark on a new corporate premise, i. e. a repositioning: social responsibility and property returns are not mutually exclusive! Doing the right thing means: SRI is a triad of social, responsibility and investing and not just “green finance” or national solo efforts to build data! We will certainly be able to see the first progress at EXPO REAL in October.

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Prof. Dr. Thomas Beyerle

Managing Director of Catella Property Valuation GmbH

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