From calls for expropriation to increasingly strict sustainability requirements for buildings: the Real Estate industry faces numerous ESG challenges – even though German companies still perform surprisingly well in many ESG ratings.

The result seems clear: more than 57% of Berlin voters want a bill on the expropriation of very large housing portfolios of profit-oriented companies. And even if the referendum is not binding and the Berlin Senate has initially only set up a commission of experts to check the feasibility of expropriation: the issue of affordable housing is
potentially explosive for the entire Real Estate sector.

And yet, increasing tenant discontent is just one of many ESG issues that will drive the Real Estate sector in the future. This holds true for companies that build and project properties as well as for large apartment owners and managers.

Real Estate: The Most Important ESG Topics

The international ESG standard SASB (Sustainable Accounting Standards Board)
defines relevant ESG indicators for investors for a total of 77 sectors. In the Real Estate sector, the focus is specifically on environmental issues.
According to SASB, the most important criteria for Real Estate companies are:

  • Measures for effective energy and water management
  • Measures to adapt to the consequences of climate change
  • Influencing the environmental impact of tenants

The assessment criteria of ESG rating agencies such as MSCI, ISS or Sustainalytics
are somewhat more comprehensive. For example, in addition to the “Opportunities in Green Building” topic area, which measures the environmental impact of the company’s own buildings, MSCI also defines the following social and governance topic areas for Real Estate companies:

  • Product safety and quality
  • Employee health and safety
  • Corporate Behavior
  • Corporate Governance

ESG-Ratings Real Estate: How Opinions Vary

Differing views on relevant ESG topic areas for Real Estate companies also lead to
differing company ratings among the largest ESG rating agencies.

For example, MSCI’s current ESG rating for Germany’s Vonovia, Europe’s largest housing group, places it in the 4th to 5th best decile of the 78 real estate companies that MSCI rates. ISS, on the other hand, sees Vonovia in the top 20% of 383 companies ranked in the Real Estate sector – and Sustainalytics ranks the company even higher: Vonovia places 3rd out of 1046 Real Estate companies – and 27th out of all 14,750 companies currently rated by Sustainalytics.

Wie Real Estate Companies Can Refinance More Easily With ESG

And investors seem to be convinced of Vonovia’s sustainability concept – especially
in ecological terms.
In 2021, for example, the company successfully placed its first green bond with a term of 10 years and a volume of € 600 million – and with a coupon of just 0.625%.

For other Real Estate companies in Germany and the EU, the example of Vonovia shows that strong ESG performance can make refinancing much easier. German MDAX
heavyweights such as LEG Immobilien or Aroundtown are also currently receiving
strong ESG ratings from major ESG rating agencies compared to their
international peers.

This Is Why ESG Is Becoming Relevant For Smaller Real Estate Companies, Too

But what does the whole ESG issue mean for real estate companies that can’t (yet) show billion-dollar valuations – and/or are not (yet) stock-listed? Can’t they ignore the ESG issue for a while longer, since they are under less investor pressure?

The short answer: no. As early as 2024, all listed companies based in the EU – regardless of their number of employees – are to submit an annual ESG report. They will be joined by all companies with more than 250 employees – regardless of whether they are listed or not.

In addition, the first requirements of the EU taxonomy come into effect in 2022, setting out requirements for the classification of sales and investments into the categories “sustainable” and “non-sustainable”. In the future, “green” financial instruments such as green bonds, green loans and sustainability-linked bonds will primarily be based on the requirements of the EU taxonomy. Companies that comply with these requirements will be able to refinance themselves more favorably with green financial
instruments than with conventional instruments. For the Real Estate sector, the
requirements of the EU taxonomy are particularly complex and cover – depending on the business model – a broad spectrum from construction and renovation to necessary measures in ownership and management.

Therefore, feel free to contact us today to benefit from our ESG consulting experience and meet current and future ESG requirements as a real estate company.

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