ESG compliance is increasingly important in assessing a property’s valuation and investment potential. Measuring a building’s ESG compliance is a challenge, and methodology varies from region to region. This article analyses how different countries and markets address the ESG challenge and how agile data management is crucial to its successful management.
The world is playing catch up to hit the 2016 Paris Agreement targets.
196 countries signed the 2016 Paris Agreement. Its objectives are to manage “the increase in the global average temperature to well below two °C above pre-industrial levels” and pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels.”
These targets are under threat. The battle to combat global warming and address the climate crisis is intensifying. The impact of climate change is being felt more severely and rapidly than previously anticipated, and achieving net-zero carbon emissions is crucial to halting the rising global temperature. News bulletins regularly carry stories of severe heatwaves, droughts, wildfires, hurricanes, floods, melting glaciers, and rising sea levels.
Groups such as the Intergovernmental Panel on Climate Change (IPCC), the American Association for the Advancement of Science (AAAS), the Royal Society, and the National Academy of Sciences regularly publish reports summarising the latest scientific research on climate change and its impacts.
The property sector needs to play its part.
With buildings responsible for around 36 % of energy consumption and 39 % of carbon dioxide emissions, the spotlight is falling on the property industry to play its part, raising the question of how the real estate industry can contribute to reducing emissions and identifying the steps being taken to put this into action.
ESG (Environmental, Social, and Governance) compliance lies at the heart of this, with organisations having to comply with metrics such as:
- Environmental: Companies are evaluated based on their carbon footprint, energy efficiency, water usage, waste management, and pollution control. This data is gathered from a company’s annual sustainability report and other sources that outline its environmental impact and efforts to reduce it.
- Social: Companies are assessed based on labour practices, employee relations, diversity and inclusion policies, human rights, and community engagement. Data is typically collected from employee surveys, stakeholder engagement reports, and other sources that provide insight into a company’s social impact.
- Governance: Companies are evaluated based on their corporate governance structures, board composition, executive compensation, risk management, and transparency. This data is usually obtained from annual reports, governance reports, and other sources that provide insight into a company’s governance practices.
ESG and the European perspective.
In Europe, the EU Taxonomy Regulation and the European Sustainable Finance Disclosure Regulation and their associated Acts aim to establish consistent EU-wide requirements for reducing CO² emissions and mitigating global warming. However, individual EU member states have some discretion in implementing climate goals via numerous EU directives.
Notably, on March 14, 2023, the European Parliament passed the ITRE Report on revising the Energy Performance of Buildings Directive – a significant step towards decarbonising the building sector in EU countries. This will seek to reduce building-related emissions over the entire lifecycle of a building.
Yet the pressure isn’t only coming from Government. In developed economies, tenants and individuals using buildings want to enjoy a cleaner, healthier, safer and more energy-efficient environment than that which preceded Covid.
ESG and the challenges posing the real estate sector.
This puts pressure on the CRE sector to accurately measure its contribution to the global effort. As Deloitte’s report “Creating sustainable value” emphatically states:
“ESG challenges are becoming a higher priority for businesses across the real estate sector, making data management more important than ever. Achieving a single data model and defining the key metrics for ESG are issues real estate players can no longer afford to ignore.”
As this article points out, the CRE sector is some way from achieving this goal.
Here are some of the practical challenges for the real estate sector:
- Property owners may struggle to collect accurate and reliable data on their environmental, social, and governance practices. This could be due to a lack of internal data systems or difficulty accessing external data sources.
- There is currently no universal standard for measuring ESG compliance, making it difficult for property owners to compare their performance against industry benchmarks. This lack of standardisation can make it challenging for property owners to report their ESG performance clearly and consistently.
- Increasingly, companies running digital transformation programmes using technology to improve their operational capability and the overall customer experience include some of the energy consumption data required to comply with ESG standards. But the extent to which digitalisation of the ESG process varies across organisations and regions.
- Measuring ESG compliance can be a resource-intensive process, requiring investment in data collection and analysis and external consultancy services. Property owners may face financial constraints when trying to implement ESG measurement systems.
- With 35% of the buildings in the EU over 50 years old and almost 75% deemed energy inefficient, the cost of upgrading properties to ESG-compliant levels can negatively affect the property’s value and reduce its attractiveness to investors.
- With older buildings, deciding whether to sell an asset in its current state, or invest in its upgrade to the required ESG levels, is the subject of much debate in the CRE community. This needs access to accurate energy consumption and efficiency data to measure whether ESG compliance affects short-term returns but would be worth it in the long term.
- Some of the Social and Governmental aspects of ESG are measured using qualitative methodology and research. For example, the extent to which a property company is involved with the local community would be vital to the “Social” assessment. Such measurements are hard to measure objectively and compare with other areas or organisations.
- Although Europe has a single climate target of achieving climate neutrality by 2050 and cutting greenhouse gases by at least 55% by 2030 compared to 1990 levels, the implementation of this target and the associated directives varies across different EU countries and differs from the strategies pursued in the UK and the US.
Against this backdrop, this article provides an overview of the diverse approaches taken by different countries to ESG compliance and any impact on the local property market.
Germany is recognised as a leading nation in adhering to ESG regulations and has taken various measures to prepare for this.
Policy and Regulation: Germany’s administration has executed multiple policies and regulations to support ESG compliance. In 2017, Germany became the first country to mandate ESG reporting for certain companies.
In 2020, Germany implemented the EU Energy Performance of Buildings Directive through the “Building Energy Act” (GEG). An amendment to the GEG, effective 1st January 2023, has raised the initial requirements for the allowable annual primary energy demand of new and existing buildings. Going forward, every new building must meet an efficiency standard of 55% instead of the previous 75%. This is another significant step by Germany towards achieving the EU’s “Fit for 55” goal of decreasing net greenhouse gas emissions by at least 55% by 2030.
Furthermore, the government has pledged to achieve climate neutrality by 2045 and is investing heavily in renewable energy.
Reporting Standards: Germany has established numerous reporting standards that endorse ESG compliance, including the German Sustainability Code (DNK) and the German Sustainability Accounting Standards (GASB). These standards offer guidance on ESG data collection, analysis, and reporting.
Energy Audits: Germany has adopted legislation that mandates large companies to perform routine energy audits to recognise opportunities for energy conservation. These audits involve analysing the company’s energy usage patterns and suggesting energy-efficient practices. Large companies listed on the German stock exchange must submit a Corporate Social Responsibility (CSR) report annually, outlining their social and environmental targets and accomplishments. Additionally, their suppliers must comply with the same standards, even if they are located in a different country or jurisdiction.
Energy Performance Certificates: Buildings in Germany require an energy performance certificate that offers information on the building’s energy efficiency. The certificate is based on evaluating the building’s energy usage and is valid for ten years.
Energy Statistics: Germany collects energy statistics on a national level to monitor energy consumption trends and inform energy policy. These statistics, which provide information on energy production and consumption across various sectors, are compiled by the Federal Ministry for Economic Affairs and Energy.
Digitalisation: Germany is a highly digitalised country, and the measurement of energy consumption has been increasingly digitalised in recent years. Here are some examples:
- Smart meters: Smart meters are increasingly being installed in German households and businesses, with the Government adopting legislation to ensure a full rollout across residential and businesses by 2030. These meters provide real-time information on energy consumption and can help consumers to monitor their energy use and make more informed decisions about their energy consumption.
- Building automation systems: Building automation systems are becoming more common in Germany, especially in commercial buildings. Systems such as Geze use sensors and control systems to monitor and control energy consumption in buildings, such as lighting, heating, and ventilation.
- Energy management software: Many German companies use energy management software, such as Dezem, to track and analyse their energy consumption. The software typically collects data from smart meters and other sources and presents it in a user-friendly dashboard. The software can help companies identify energy savings opportunities and track progress towards energy efficiency goals.
- Energy data platforms: Several energy data platforms in Germany provide data on energy consumption and production, such as the Energy Data Platform of the Federal Network Agency. These platforms provide access to data on energy consumption and production across different sectors and can help to inform energy policy.
In recent years, the UK has taken an active stance towards achieving Environmental, Social, and Governance (ESG) compliance. Below are a few examples of the UK’s preparedness:
Regulation and Policy: The UK has developed a robust regulatory and policy framework to support ESG compliance.
The UK government has established the Task Force on Climate-related Financial Disclosures (TCFD) to encourage companies to disclose their climate-related risks and opportunities.
As of 2018, commercial properties in the UK must have a minimum Energy Performance Certificate (EPC) rating of E before being subject to a new lease. Since April 1, 2023, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 have been extended. Non-residential buildings with an energy efficiency rating below E are no longer eligible for rent unless a statutory exemption is applicable or the building is excluded from the legislation. The energy efficiency requirements for non-residential buildings will be further increased, with the British government targeting a minimum rating of B for all rented non-residential buildings by 2030 and proposing an interim target of a rating of C by 2027. As the deadline for April 2023 approaches, many landlords have retrofitted their buildings to attain an EPC rating of E. However, additional investment is necessary to achieve the 2027 and 2030 targets.
In addition, the UK government has set a target of achieving net-zero emissions by 2050, encouraging numerous companies to establish their own emissions reduction targets.
Reporting Standards: Several reporting standards in the UK provide guidance on ESG data collection, analysis, and reporting. These standards include the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB).
Education and Awareness: The UK has taken significant steps to educate businesses and investors about the importance of ESG compliance. For example, the UK Financial Conduct Authority has issued guidance on ESG investments for financial advisers, and the London Stock Exchange has launched a sustainability education platform for businesses.
Digitalisation: More UK organisations are digitalising the process of measuring and complying with ESG standards, using a variety of methods:
- Smart Meters: Smart meters, similar to Germany, are being deployed throughout the UK to install in all households and businesses by 2025. These meters provide real-time energy consumption data, allowing consumers to monitor their usage and make informed decisions.
- Building Energy Management Systems: Many commercial buildings in the UK now use Building Energy Management Systems (BEMS) to monitor and control their energy consumption. These systems use sensors and control systems to optimise lighting, heating, and cooling energy usage.
- Energy Management Software: Like Germany, many UK companies use energy management software services to track and analyse their energy consumption. The software usually involves collecting data from smart meters and other sources and presenting it in a user-friendly dashboard. This allows companies to identify opportunities for energy savings and monitor progress towards energy efficiency goals and ESG compliance.
- Energy Data Platforms: In 2022, the UK government created the Energy Innovation Data Hub with an investment of £50m. This energy data platform provides access to data on energy consumption and production in various sectors. This data helps inform energy policy.
The Dutch government has implemented a range of policies and regulations to promote ESG compliance, including:
Regulation and policy: The Dutch Government wants to reduce greenhouse gas emissions by 48% by 2030 compared with 1990 levels and a 95% reduction by 2050.
On 1 January 2023, several new legal and regulatory requirements were implemented, indicating a clear direction towards increasing requirements over time to combat climate change. One of the new requirements, mandated by the Building Decree (Bouwbesluit), stipulates that office buildings must have an energy efficiency rating of A, B, or C, with certain exceptions for listed buildings, small office premises, and those with unsustainable costs. As of 1 January 2023, 10% of office buildings in the Netherlands had a rating of D or worse, while 35% had no rating. If an office building does not meet the rating requirement, the local municipality can stop its use until the building achieves a rating of C or better.
By 2030, all office buildings must have an energy efficiency rating of A.
Reporting standards: The Netherlands has adopted several reporting standards that support ESG compliance, including the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP), which provide guidance on collecting, analysing, and reporting ESG data.
Collaboration and partnerships: To promote ESG compliance, the Dutch government, businesses, and civil society organisations collaborate and form partnerships. For instance, the Sustainable Finance Platform Netherlands brings together financial institutions, businesses, and policymakers to advance sustainable finance in the country.
Education and awareness: The Netherlands has undertaken significant efforts to educate businesses and investors about the significance of ESG compliance. The Dutch government offers subsidies for businesses to improve their sustainability practices, and several universities in the country provide ESG-related courses and programs.
Digitalisation: Digital technologies have been instrumental in enhancing and streamlining ESG compliance processes in the Netherlands in several ways:
- Smart meters have now been installed in nearly every Dutch home.
- As with the UK and Germany, many companies use Digital Energy Management systems to measure and manage consumption.
- Energy management analytical software is now commonly used in many Dutch companies.
- The Dutch Government encourages companies to use the Carbon Disclosure Project (CDP) platform to report their environmental impact and climate-related risks in a standardised way. This platform facilitates data collection, analysis, and benchmarking of sustainability performance.
France has been actively promoting and implementing ESG (practices in recent years, both at the governmental and corporate levels.
Regulation and policy: In terms of environmental sustainability, France has set ambitious targets to reduce GHG emissions by 40% by 2030 from 1990 levels (and by 75% by 2050) and cut final energy consumption by 30% by 2030 from 2012 levels (and by 50% by 2050).
The Energy Transition Law framework and its associated action plans have been developed to provide France with the necessary tools to broaden its energy sources and bolster its efforts to address climate change. This comprehensive approach encompasses various economic sectors and imposes mandatory energy objectives for renewable energy, transportation, and housing.
The country has also promoted sustainable agriculture and reduced waste, such as through the Circular Economy Roadmap.
Social and governance: France has introduced regulations promoting diversity and inclusion, such as the Gender Equality Index and the French Law on the Duty of Vigilance. Additionally, the country has implemented measures to improve labour standards, including increasing the minimum wage and strengthening workers’ rights.
At the corporate level, many French companies have adopted ESG policies and practices, and investors in France are increasingly considering ESG factors when making investment decisions. The country also has several ESG-focused financial institutions and indices, such as the CAC 40 ESG Index.
Digitalisation: France has made impressive progress in digitising the ESG compliance process, especially in the corporate sector. Various initiatives have been introduced to enhance transparency, efficiency, and sustainability performance. Here are some examples:
- Smart meter rollout. This has had some resistance from the public, with the older generation seemingly reluctant to install smart meters. However, a new law now states that from January 1 2023, all households must accept having a smart meter.
- Several ESG rating agencies, including Vigeo Eiris and Ethifinance, are based in France and use digital tools to assess companies’ ESG performance. To create ratings and rankings, these agencies gather and evaluate data from various sources, such as company reports, news articles, and social media.
- Large companies turning over 100m EUROS and quoted on the French Stock exchange must submit a CSR report annually detailing their social and environmental achievements. Suppliers must sign up for the standards the company sets even if they are from a different country or jurisdiction.
- French companies increasingly employ digital tools to evaluate their sustainability performance and identify improvement areas. For example, Schneider Electric uses EcoStruxure, a digital platform, to manage energy consumption in buildings and industrial facilities.
- French companies are exploring blockchain technology to enhance supply chain transparency and traceability. Carrefour, a leading French retail company, has implemented a blockchain-based system to track the origin and quality of its food products.
ESG compliance reporting is making progress – if in a haphazard and inconsistent way
The analysis above indicates that whilst all countries share the common goals set out in the 2016 Paris Agreement, they all have different strategies and methodologies to comply with the associated ESG targets required to achieve the targets set.
Most leading economies are progressing in implementing programmes to reduce energy consumption and GHG emissions but are at different stages. The social and governmental aspects of ESG, more qualitative in nature to measure, vary considerably from region to region.
Digitisation and easy access to data and information is crucial
One common factor is that the processes for measuring ESG compliance are increasingly being digitalised. Digitisation is vital for ESG compliance because it supports transparency, efficiency, standardisation, scalability and easy access, all of which are essential for ensuring that companies achieve their sustainability objectives and commitments:
Transparency: Digital tools can enhance transparency and accountability by providing stakeholders, such as investors and customers, with real-time data and insights into a company’s ESG performance. This allows them to make informed decisions and hold companies responsible for their sustainability practices. Vital digital certificates of compliance can be stored and accessed.
Efficiency: Digitization can simplify the ESG compliance process, enabling companies to collect, analyse, and report on ESG data with greater ease. This can save time and resources, allowing companies to concentrate on enhancing their sustainability performance.
Standardisation: Digital tools can assist in standardising ESG reporting, making it easier for companies to compare their sustainability performance with their peers and enabling investors to evaluate the sustainability risks and opportunities associated with various companies.
Scalability: Digital tools can make it possible to scale ESG compliance across large, intricate organisations with numerous locations and supply chains. This guarantees that sustainability standards are consistently maintained across the entire organisation.
Secure, fast, agile access: A service such asDrooms Data Rooms provides secure digital data management with fast, agile access to ESG data and information – a crucial part of the asset transfer and due diligence process.
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