ESG in Real Estate: A Must-Have
As an end-user, real estate organization, or investor, you can no longer ignore ESG. What was once a nice-to-have is now a crucial factor in the real estate selection process. Property owners and users are looking beyond just profit; they are increasingly weighing companies' impact on people (People), the environment (Planet), and society (Prosperity) in their investment decisions.
Do you want to know how ESG can strengthen your real estate strategy? This blog provides answers to:
What is ESG
The origins of ESG
ESG in the real estate sector
The ESG score
The benefits of an ESG strategy
For whom is ESG mandatory
The added value of EYE Real Estate
What is the ESG
ESG stands for Environmental (environment), Social (society), and Governance (management). This framework assesses how sustainably and ethically a company or organization operates. Companies that score high on ESG are often seen as solid long-term investments.
The three pillars of ESG explained:
1. ENVIRONMENTAL
This pillar measures a company's impact on the environment. Companies that excel in this focus include:
CO2 reduction
Sustainable energy management (renewable sources, reduced consumption)
Sustainable water management
Waste minimization
Biodiversity protection
Conservation of natural resources
Green building certifications (e.g BREEAM, LEED)
2. SOCIAL
This concerns a company's social responsibility both within and outside the organization. Key aspects are:
Human rights
Fair labor conditions
Workplace safety and health
Diversity and inclusion
Community engagement
Customer satisfaction
3. GOVERNANCE
Governance assesses how well a company is managed. Governance refers to the internal systems and controls a company uses to oversee itself
Crucial factors are:
Board structure and composition
Transparency and ethics
Independence of the board of directors
Shareholder rights
Risk management and internal controls
The origin of ESG
The ESG principles are inspired by the United Nations 17 Sustainable Development Goals (SDGs), which aim to eradicate poverty, protect the planet, and ensure prosperity and peace. To help companies develop an ESG strategy, these goals have been translated into 10 core principles:
- Respect and protect internationally recognized human rights.
- Avoid complicity in human rights abuses.
- Uphold the freedom of association and collective bargaining.
- Eliminate all forms of forced or compulsory labor.
- Abolish child labor.
- End discrimination in employment and occupation.
- Proactively address environmental issues.
- Take responsibility for environmental management.
- Promote environmentally friendly technologies.
- Combat all forms of corruption, including extortion and bribery.
ESG in the real estate sector
An effective ESG strategy should stem from intrinsic motivation, not just compliance. Unfortunately, in the real estate sector, ESG is not always implemented with this conviction, leading to instances of "greenwashing."
Fortunately, external pressures, such as legislation and regulations, are driving positive change. Various European laws and directives are encouraging a genuine and sustainable transition in the sector.
Key laws and directives include:
- Paris Climate Agreement
- EU Taxonomy
- Sustainable Finance Disclosure Regulation (SFDR)
- Corporate Sustainability Reporting Directive (CSRD)
- Corporate Sustainability Due Diligence Directive (CSDD)
The ESG score
The ESG score is a number between 0 and 100, which can be calculated by specialized consultants. The score is determined using:
- Publicly accessible data
- Government data
- Self-supplied data
A high ESG score (>70) indicates strong performance in environmental, social, and governance areas. This often reflects a sustainable and responsible business policy, which can contribute to better long-term outcomes and reduced risks.
A low ESG score (<50) suggests significant risks and deficiencies in one or more ESG categories. This may indicate issues with environmental practices, unethical social practices, or weak governance structures.
Note that the exact thresholds and interpretations of ESG scores can vary depending on the consultants and methodologies used. What is considered a "high" score may differ by sector or region.
The benefits of an ESG strategy
An ESG strategy provides long-term value by making real estate and companies more attractive to tenants and investors. Adhering to ESG principles also helps meet growing regulations and expectations around sustainability and corporate social responsibility (CSR). Developing an ESG strategy and regularly reporting on its impact offers the following benefits:
- Increased Transparency: Enhanced credibility and trust through clear sustainability claims.
- Stronger Relationships: Improved connections with customers, employees, suppliers, and communities through a committed and responsible image.
- Attractiveness to Stakeholders: Greater appeal to tenants, investors, and stakeholders due to proven dedication to sustainability.
- Better Risk Management: Effective identification and mitigation of environmental and social risks.
- Enhanced Sustainability Performance: Improved outcomes through targeted strategies and initiatives.
- Reduced Costs: Lower operational and capital costs from more efficient processes and technologies, and stabilized revenues from a stronger market position.
- Stimulated Innovation: Encouragement of new solutions and technologies through sustainable practices.
- Positive Reputation: A strengthened corporate image that makes the company more attractive to stakeholders.
To whom does the ESG reporting obligation apply?
Companies may choose to publish an annual ESG impact report for several reasons, including:
- Compliance: Meeting legal obligations under the CSRD and ESRS.
- Proactive Compliance: Anticipating future legal requirements set by the CSRD and ESRS.
- Building Trust: Gaining confidence from stakeholders and shareholders through transparency and accountability.
- Competitive Advantage: Leveraging a strong sustainability reputation to outperform competitors.
- Strengthening Collaboration: Enhancing cooperation within the supply chain.
The CSRD (Corporate Sustainability Reporting Directive) is designed to encourage companies to take responsibility for their sustainability performance and provide greater transparency to investors, consumers, and other stakeholders. It aims to combat greenwashing by replacing the Non-Financial Reporting Directive (NFRD) and expanding reporting requirements to a broader range of companies. The CSRD demands more detailed and standardized information on sustainability practices and performance.
The CSRD and ESRS reporting requirements are being introduced in phases. Companies already covered by the NFRD must start reporting under the CSRD from the fiscal year beginning on or after January 1, 2024.
Interested in more information about the CSRD? Be sure to check out our blog on the CSRD.
Must read: CSRD: A revolution in the Real Estate Market
Conclusion
The ESG score is a measure between 0 and 100 that evaluates companies on their environmental, social, and governance performance. A high ESG score (>70) indicates strong sustainability performance and can lead to better long-term results, while a low score (<50) reveals significant shortcomings and risks.
Companies publish ESG impact reports to comply with the CSRD and ESRS reporting requirements. The CSRD (Corporate Sustainability Reporting Directive) replaces the Non-Financial Reporting Directive (NFRD) and mandates more detailed and standardized sustainability information to combat greenwashing. Reporting obligations will be phased in, starting on January 1, 2024, for companies already covered by the NFRD.
An effective ESG strategy offers several benefits, including:
- Transparency in sustainability claims
- Stronger relationships with all stakeholders
- Greater attractiveness to tenants and investors
- Improved risk management and enhanced sustainability performance
- Lower operational and capital costs, and reduced revenue volatility
- Stimulation of innovation and a positive reputation
These benefits not only help companies meet legal requirements but also provide a competitive edge and build trust with stakeholders.
EYE Real Estate: Your partner for sustainable real estate
At EYE Real Estate, we elevate your real estate projects by putting ESG principles at the forefront. As a developer, we offer:
- Sustainable Real Estate: We integrate the latest ESG standards into every project, providing a competitive edge and ensuring a sustainable future.
- Regulatory Compliance and Beyond: Our properties not only meet CSRD and ESRS requirements but exceed them, keeping you ahead of the curve.
- Cost Efficiency and Innovation: Our approach leads to lower operational costs and fosters innovative, energy-efficient solutions.
- Value Creation: With our ESG-optimized projects, we enhance appeal to investors and tenants, contributing to a strong market position.
EYE Real Estate develops properties that not only meet the highest sustainability standards but also add value to your portfolio and market position. Discover how our ESG-driven projects can accelerate your success.
Want to learn more about how we can assist you in making your real estate portfolio more sustainable? We are here to help. Contact us today for a free consultation.
