ESG in the real estate industry – quo vadis?

Germany

ESG factors and corresponding legal regulations have become increasingly important in the real estate industry. This is because they effect the entire life cycle of a property - from financing and planning to realisation, construction and use, and ultimately, to selling it.

The risk of a property losing value or even becoming a "stranded asset" because sustainability criteria are not met is therefore an issue of concern for all parties involved in the real estate industry. To prevent this from happening, it is important to keep an eye on the legislative requirements and developments and to take action in good time.

Sustainability in real estate investments

The European Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy for sustainable activities (EU Taxonomy) contain the obligation to disclose sustainability objectives, the criteria for their achievement and information on the achievement of objectives. As of 1 January 2023, the Regulatory Technical Standards to the Disclosure Regulation will apply, which determine the specific content, the methodology to be used and the manner of presenting the information to be disclosed. The EU Taxonomy defines when economic activities are environmentally sustainable. The taxonomy compliance of a property can be assessed using the technical assessment criteria of the delegated acts of the EU taxonomy. Even if the SFDR and the EU Taxonomy are initially only directed at certain financial market participants and companies, the obligations established in them already affect the entire real estate industry, at least indirectly. Properties that do not meet these criteria will be very difficult to finance and, as a result, there will be less demand for them on the market in the medium to long term; this is likely to have a negative impact on price development.

Tightening up EU directives for a climate-neutral building stock

The European Climate Law has enshrined in law the achievement of the EU climate target to reduce emissions in the EU by at least 55% by 2030 (compared to 1990 levels). To achieve this and climate neutrality in the EU by 2050, the "Fit for 55" package includes updating and tightening the Energy Performance of Buildings Directive (EPBD).

In October 2022, the Council reached an agreement on stricter rules for the energy performance of buildings and the revision of the Directive. All new buildings are to be zero emission buildings by 2030 at the latest. For new buildings in public ownership, the target is 2028. Existing buildings must be transformed to zero emission buildings by 2050.

The proposed amendments are still negotiated in the European Parliament and will need to be implemented on a national level after a European agreement has been reached. But it is already clear: stricter requirements for sustainability criteria in the buildings sector are coming and must be observed in planning, realisation and construction.

National regulations for more sustainability in the buildings sector

According to the German Federal Environment Agency the buildings sector causes 35 % of final energy consumption and about 30 % of CO2 emissions in Germany. As the permissible annual emission levels in the building sector under the Climate Protection Act were exceeded by two million tonnes of CO2 equivalents in 2021, in July 2022 the Federal Ministry for Economic Affairs and Climate Action and the Federal Ministry for Housing, Urban Development and Building launched an "Immediate Programme for the Buildings Sector". The programme's climate protection measures focus, among other things, on amendments to the Building Energy Act (Gebäudeenergiegesetz, GEG) and the reform of the Federal Support for Efficient Buildings (Bundesförderung für effiziente Gebäude, BEG).

ESG is more than just "E"

For the real estate industry, ESG means not only contributing to climate and environmental goals, but also taking social aspects and corporate aspects into account. The areas of "social" and "governance" are increasingly reflected in legislation. For many companies, the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtgesetz, LkSG) will apply from 2023 and will impose requirements on corporate due diligence. Reporting obligations are also being expanded through new reporting directives such as the EU Corporate Sustainability Reporting Directive (CSRD). The CSRD proposal, which replaces the previous "CSR Directive", was adopted by the European Parliament and endorsed by the European Council in November 2022. The CSRD was published in the Official Journal of the European Union on December 16 and entered into force at the beginning of January 2023. Not only will this increase the requirements for sustainability reporting, but it will also make it more binding. At European level, there are also continued efforts to introduce a "social taxonomy" to define social goals and obligations. In order for a company in the real estate sector to be fit for the future, they have to take a holistic approach to environmental, social and governance aspects.

Ongoing legislative activity

It is already clear that both the EU and national legislators will further tighten the existing legislation. If the annual targets for achieving Net Zero in the real estate industry are not met, the legislator will attempt to counteract this with new legislative measures. The real estate industry will therefore have to adapt to constantly changing conditions in coming years.