At Provada 2023 in Amsterdam, Dorine van Amerom, Business Development Manager BeNeLux at Drooms, and Iris Kampers, Associate Director and Sustainability Advisor at Savills, sat down for an insightful fireside chat on one of real estate’s biggest topic: ESG. In this blog, we uncover the key insights from their discussion, from common risks investors should be aware of to how businesses can deliver true impact whilst avoiding greenwashing.
Key ESG issues and risks facing the real estate industry
Energy efficiency and carbon emissions reduction take centre stage as governments and policymakers strive for climate change mitigation and net-zero targets. Social factors such as inclusivity, diversity, and employee well-being are also gaining prominence, while governance practices like transparency and ethical decision-making play a vital role in successfully implementing ESG initiatives.
But when it comes to ESG compliance there is still a limited understanding of what that actually entails amongst many investors. ESG regulations and constantly evolving and regional variations in requirements make compliance a complex task, especially for companies with a global real estate portfolio. Implementing the right framework and staying up to date with changing laws and reporting standards can be complex and resource-intensive. That’s why many companies are hiring dedicated ESG specialists or engaging the expertise of consulting firms.
Choosing the right ESG consultant can also have its risks. An inexperienced specialist may lack the knowledge and expertise to conduct a comprehensive and accurate assessment of the building’s ESG performance. This can result in incomplete or flawed evaluations, leading to ineffective strategies and missed opportunities for improvement. With the increasing demand for external consultants in this field, it’s a challenge to identify proven experts. To mitigate these risks, it is advisable to thoroughly assess the qualifications, experience, and track record of ESG specialists before hiring them. Working with reputable consultants or seeking partnerships with experienced ESG firms can also help ensure effective guidance and successful implementation of sustainable practices.
Real estate professionals are also expressing concerns about the costs of implementing ESG changes. Most buildings will require upgrades and retrofitting in order to meet standards. Depending on the age of the building this cost could rise quite significantly. Iris noted during the fireside chat that “whilst investors must carefully assess the potential expenses of implementing ESG initiatives, they should simultaneously remember the long-term value that sustainable investments can generate.” Buildings with poor environmental performance often suffer from a ‘brown discount,’ while sustainable assets enjoy a ‘green premium’ due to lower operating costs, higher rents, and increased capital values. So, yes, ESG requires upfront investment, but the returns can be substantial and worthwhile.
Key benefits of implementing ESG initiatives
ESG compliance offers several benefits for asset owners:
- Improving reputation & strengthening brand image: By implementing ESG initiatives, companies can demonstrate that they are ethical, reliable, and trustworthy – and that their assets are future-proof.
- Attracting new business: ESG-focused companies often attract more socially conscious investors, leading to increased access to capital and improved financial performance.
- Mitigating long-term risk: According to The ESG Report, “Companies that demonstrate commitment to ESG are seen as more ethical, reliable and trustworthy in the eyes of customers, leading to better customer loyalty and a favourable reputation in the market.”
- Improving operational efficiencies: Buildings that are sustainable have lower operating costs due to maximised energy efficiency.
- Regulatory compliance: As already mentioned, governments and policymakers are introducing new laws that make ESG compliance a must-have. Non-compliance will likely have legal and financial consequences.
“Real estate companies are incorporating ESG considerations into their investment strategies by integrating ESG assessments into due diligence processes,” explained Iris. Such ESG reports collate vast amount of data to analyse a property’s environmental, social and governance performance. They evaluate potential risks and showcase opportunities for improvement – a holistic approach that allows investors to make informed decisions aligned with their ESG objectives.
How does the Dutch real estate market compare to other European markets in terms of ESG compliance?
Iris explained that “Compared to the rest of Europe, the Dutch real estate market is at the forefront of ESG compliance. The Netherlands has robust legislation and governance tools in place, ensuring companies are held accountable for their sustainability practices.”
Additionally, Dutch investors and occupiers are increasingly demanding higher ESG standards, driving the market’s focus on sustainability. The country has set ambitious targets for reducing carbon emissions and increasing energy efficiency. For instance, the Dutch government aims to achieve a CO2-neutral built environment by 2050. The Building Decree (Bouwbesluit) also mandates that office buildings require a minimum energy efficiency rating of A, B or C. These commitments align with the Paris Agreement and demonstrate the country’s dedication to combating climate change.
Delivering true impact and value: How can companies avoid greenwashing?
As sustainable investing is gaining momentum, so is the scrutiny against potential greenwashing. Investors must ensure that their strategies deliver genuine impact and value, whilst avoiding the pitfalls of greenwashing. Iris explained that to achieve this, investors should:
- Define investment objectives: Clearly articulate specific sustainability goals that align with clients’ values and financial objectives, providing a framework for the investment strategy.
- Conduct thorough research and due diligence: Look beyond marketing materials, seeking reliable sources of information to evaluate potential investments’ sustainability claims. Collaborate with specialised advisors to distinguish true sustainability from greenwashing.
- Seek guidance from experts: Engage sustainability experts, impact investment specialists, and financial advisors with expertise in sustainable investing to navigate complex ESG issues effectively.
- Collaborate with like-minded investors: Join industry networks, initiatives, and forums to collaborate, share knowledge, experiences, and best practices, amplifying the positive impact.
- Monitor and report impact: Actively monitor and regularly evaluate environmental and social impacts of investments, using established impact measurement methodologies. Transparently report this information to all stakeholders, demonstrating real-world outcomes of investments.
Successful ESG initiatives: Impact on financial performance and stakeholder engagement
There are numerous notable ways to successfully implement ESG, which have a positive impact on financial performance and stakeholder engagement. The following are a few examples:
- Energy efficiency improvements: Implementing energy-efficient measures in commercial buildings, such as upgrading insulation, installing efficient HVAC systems and solar panels, and utilising smart energy management technologies, can significantly reduce operating costs. This leads to improved financial performance for building owners and increased tenant satisfaction. Energy-efficient buildings also contribute to lower greenhouse gas emissions, aligning with sustainability goals.
- Green building certifications: Obtaining certifications like LEED (Leadership in Energy and Environmental Design) or BREEAM (Building Research Establishment Environmental Assessment Method) for new or existing properties showcases a commitment to sustainable practices. These certifications consider factors such as energy and water efficiency, waste management, indoor air quality, and sustainable materials. Properties with green building certifications often attract environmentally conscious tenants and investors, leading to increased stakeholder engagement and potentially higher rental or resale values.
- Socially Responsible Investing (SRI) and impact investing: Incorporating social and community-focused initiatives into real estate investments can have a positive impact on stakeholder engagement and financial performance. Examples include investing in affordable housing projects, creating mixed-use developments that promote inclusivity and accessibility, and supporting community development programs. These initiatives not only enhance the social fabric of the area but can also generate long-term financial returns and positive reputation for the real estate companies involved.
- Climate risk assessment and adaptation strategies: Real estate companies that proactively assess and address climate-related risks can safeguard their investments and financial performance. By conducting risk assessments to identify vulnerabilities and implementing adaptation strategies, for example flood-resistant infrastructure, companies can mitigate potential damages and disruptions caused by climate change. These actions enhance stakeholder confidence and demonstrate a commitment to long-term sustainability.
- Stakeholder engagement and transparency: Emphasising meaningful stakeholder engagement and transparent reporting of ESG efforts can build trust and strengthen relationships with investors, tenants, employees, and the local community. Regularly communicating ESG initiatives, progress, and outcomes fosters accountability and demonstrates a commitment to responsible practices. This transparency can positively influence stakeholder perceptions, attract investment, and enhance the overall financial performance of real estate companies and their assets.
Not to be forgotten: The ‘S’ and ‘G’ in ESG
Iris agreed that social and governance factors are gaining more prominence: “While the ‘E’ has been a quick-win solution due to its relatively easy measurability, especially for the real estate industry, we are now witnessing substantial progress on the ‘S’ front as well.” There are a number of ways of measuring social factors, including the number of jobs generated, the percentage of affordable housing created, the consideration of community feedback in the project, wellbeing surveys, and many more. “The E and the S are the compliance goals you set, and the G is how you are going to get there,” Iris pointed out.
How to get started on preparing for ESG regulation
Iris urged organisations who haven’t yet started preparing for ESG regulation to act now. The notion that its best to “wait it out until ESG regulations are clear” is a widespread myth – growing pressure and public opinion are driving governments worldwide to achieve targets. Whilst some countries are acting faster than others, the global trend will accelerate as we approach net-zero targets by 2050.
By no means should companies try to implement every aspect of ESG compliance at the outset – we recommend starting with small steps and building an effective ESG strategy, together with experts, bit by bit. An effective starting point is to review your current data and measure it against ESG regulations. This allows companies to see what data is already being measured and what’s missing and align this with their business and investment strategy. If you are unsure of how to get started and overwhelmed by the amount of frameworks and regulations on the market today, Iris recommends using the “Paris Proof”. It’s based on the Paris Agreement and provides a sade and widely accepted foundation for ESG.
ESG is a crucial aspect of the real estate industry in 2023 – and is here to stay. By implementing ESG initiatives, companies can improve their financial performance, enhance stakeholder engagement, and contribute to a more sustainable future. With the guidance of experts like Iris Kampers, organisations can navigate the evolving ESG landscape and seize the lucrative opportunities that come with it.
