Five key actions for investors amid Europe’s growing focus on ESG

Sustainability credentials are now a major factor for real estate investors

Fevereiro 25, 2022
  • Kim Markiewicz

The fast-evolving ESG regulatory landscape across Europe is driving a monumental shift in how investors need to look at real estate.

In the wake of COP26, Net Zero Carbon (NZC) targets have become almost universal, with 90 percent of global GDP now covered by a net zero target of some kind, according to the Net Zero Carbon Tracker.

To reach net zero by 2050, real estate portfolios must halve emissions by 2030; the time for action is now. Indeed, early anecdotal evidence in Europe suggests that buyer pools are already shrinking if a seller shows substandard data about its net zero trajectory.

Here are five key areas investors need to focus on in the coming year.

Doubling down on data

Lack of data is often cited as a major barrier to understanding the carbon footprint of an asset or portfolio, and how to underwrite this NZC transition will be a key issue facing investment managers this year.

Tools such as the Carbon Risk Real Estate Monitor (CRREM) are now coming to market and can help with understanding an asset's carbon trajectory by clearly showing the year in which it would become a stranded asset (‘stranding year’) and the potential decarbonization pathway.

Building successful partnerships

No one will be able to achieve net zero alone, partnerships will be imperative.

Unfortunately for investors, the operational carbon of their assets depends largely on tenants. Achieving net zero will require greater transparency between tenants and landlords to monitor and share energy consumption data. Engaging tenants on this path could prove to be a challenge, but the market leaders will be those landlords who are able to reach a win-win scenario for both parties: if a tenant reduces carbon emissions, they receive a more favourable rent.

Understanding EU Taxonomy & SFDR

Introduced in mid-2020, the EU Taxonomy provides businesses and investors with a common language to identify to what degree economic activities can be considered environmentally sustainable.

One of the key goals of the taxonomy is the reallocation of capital flows to sustainable investments, this is why it will become boilerplate language during sales processes this year. It will become a necessary due diligence requirement in transactional processes, particularly core and brand-new developments, by the end of 2022.

Additionally, all fund managers will need to comply with SFDR (Sustainable Finance Disclosure Regulation) as the first reporting period will be year-end December 2022. According to the SFDR, real estate funds that promote environmental and/or social characteristics (known as Article 8 funds) and which have sustainable investment as their objective (Article 9 funds) must now disclose how and to what extent investments within these funds comply with the EU Taxonomy.

Tackling the ‘S’ of ESG

Investors will increasingly be asked how they are addressing the S of ESG. A Global ESG Survey by BNP Paribas in 2019 found that 46 percent of investors surveyed (347 institutional investors) found the social aspect to be the most difficult to analyse and embed in investment strategies.

The EU Social Taxonomy is due to be released this year which will be built into the existing Environmental Taxonomy to form one overarching taxonomy. It will clearly define what constitutes a substantial contribution to a social objective and offer clarity for investors.

Whether or not real estate activities are socially sustainable will become increasingly important and, as with the EU Taxonomy, those investors that prepare sooner rather than later will have a head start.

Upskilling and training employees

The responsibility of climate action can no longer solely fall on sustainability professionals. It’s imperative that everyone across the industry has a seat at the table. More time will need to be spent training and upskilling team members on sustainability in the built environment to ensure everyone, from asset managers to advisors, is equipped to embark upon the great challenge ahead.