Why compliance with ESG regulation is no longer enough

by | Sep 6, 2022

Deloitte Head of Debt & Capital Advisory and Real Estate Sector Leader John Doddy, pictured above, explains:

Considering sustainability in real estate is no longer just a nice to have, it is essential. While existing legislative requirements, such as Nearly Zero Energy Building (NZEB) standards and BER A2 homes, ensure a significant reduction in emissions, investors are demanding their investees commit to more than just compliance with current building standards.

Reporting on sustainability is becoming market standard with comprehensive, science-based reports a key requirement of stakeholders and it has become increasingly vital to real estate investors.

This is evident from the development of the sustainability guidelines of the European Association for Investors in Non-Listed Real  Estate Vehicles (INREV) to also adhere to investors’ needs.

Another indication is the increased participation in the GRESB (formerly Global Real Estate Sustainability Benchmark) real estate assessment. This is the investor driven global ESG benchmark and reporting framework for listed property companies, private property funds, developers and investors that invest directly in real estate.

ESG is here to stay and will increasingly shape and influence real estate valuation, and therefore real estate investment, as investors wish to allocate their commitments under this banner.

GRESB reporting can also help developers achieve ESG ratings such as LEED and Well Platinum, which many organisations require as part of their key criteria when considering a lease or purchase.

Similarly, failing to meet non-legislative sustainability standards may prevent developers and property owners attracting investment and capital, for example:

• EU Taxonomy alignment determineswhether buildings are eligible to underpin green bonds, which make up 12 per cent of global bond issuances according to Moody’s

• Investment managers interested in Article 8 or 9 classification under Sustainable Finance Disclosure Regulation (SFDR) are restricted from investing in assets without clear ESG objectives

• The Irish Government has green procurement policies setting sustainability requirements, including on construction, for any organisation wishing to participate in its tenders

Developers need to ensure buildings are both well-built and meet the evolving needs of the community

Embodied carbon

The NZEB standards have minimised the operational carbon of new builds, meaning upfront embodied carbon, the emissions associated with construction and materials, represents a larger percentage of buildings’ whole lifecycle carbon.

Investors and businesses who have set Net Zero targets are starting to identify embodied carbon as a barrier to achieving them. This does not mean that demand for new builds will cease, but it does mean that meaningful ESG improvements are expected earlier in the project planning process and decisions around practices used on the construction site will receive greater scrutiny.

To avoid assets becoming redundant before they are even built, developers need more time and new skills to ensure emissions are minimised in every step of the construction process.

To address this, many construction companies are already incorporating carbon measurement into their environmental impact assessments to budget emissions across the lifespan of a building.

For construction firms capable of energy efficient retrofitting, there are significant growth opportunities to take advantage of thanks to substantial EU and Irish subsidies for residential and commercial properties.

Social impact

Greater attention is being paid by investors and real estate companies to the social issues that affect their stakeholders and the impact on the community.

Developers need to ensure buildings are both well-built and meet the evolving needs of the community. Community opposition is incredibly powerful, failing to consider the social implications of a new development can result in costly delays and irreparable reputational damage.

Even before the Covid-19 pandemic there has been an acceleration in the demand for socially conscious buildings and social impact investing, but Covid-19 seems to be reshaping how the community should interact and behave, which also calls for a revaluation of the  current transport, technology and health infrastructures.

Many long-term investors are now seeking to secure sustainable assets to provide reliable cash flows underpinned by social housing,  hospitals and community spaces. However, the major obstacle that many investors face is the fact that they will need to reinvent their traditional investment models to match the needs of the local community.

Like many governments around the world, the Irish Government has committed to considerable investment in its Ireland 2040 plan to support social infrastructure.

The goal posts are constantly moving when it comes to best practice and regulations are still catching up. However, investors are  under increasing pressure to act first, which will ultimately influence real estate valuations and leave businesses that are not yet ‘sustainability proofed’ behind.

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