ESG and Real Estate between impacts and opportunities
15 December 2021 - Insights

ESG and Real Estate between impacts and opportunities

All great revolutions are born from times of crisis; the one underway in real estate, in the name of environmental, social and governance sustainability (ESG) is no exception.

As the climate has become increasingly severe and devastating in recent years, we've grown to realize how much the current environmental crisis represents, on a global scale, the biggest threat of our times. And since buildings are responsible for over a third of global Co2 emissions, it's no surprise ESG themes have become a priority for everyone in the industry.

ESG compliance in real estate has therefore gone from being a nice to have to becoming a strategic imperative. Owners, investors, landlords, tenants, and service providers are all adjusting their strategies towards more sustainable and responsible development, aware of the industry's role in helping the world go green.

But what does this sustainable evolution mean for the real estate sector? Here are some considerations between impacts and opportunities.

A competitive edge

Compliance with ESG principles is a challenge, but also a new opportunity to increase the competitive edge on the market. In addition to contributing to a more sustainable world, properties with good environmental, social, and governance performance indicators are in higher demand. The reason is obvious: nowadays, we are willing to pay more for products that meet ESG criteria, in terms of both rental and purchase price (approx +10%). Plus, in the long term, the sustainable development of a building can also reduce management costs and maximize savings.

Increasingly stringent regulations

To deal with climate change, the new European policies calling for a total cut in carbon emissions by 2050 have accelerated the adoption of ESG criteria. There are already voluntary certification systems that assess the sustainability performance of a building, such as BREEAM, which rewards assets with low environmental impact, and LEED, which evaluates green buildings. Even though there's no transparency requirement in Italy yet, ESG-related certifications for buildings are becoming more of a necessity than an option. This is because investors are paying more and more attention to sustainability performance, often accompanied by green due diligence. In addition, the EU is introducing regulations and measures in line with the Community goals of energy and ecological transformation, such as the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR).

The “brown discount” risk

High-quality, zero-impact assets are in high demand among tenants, even better if certified. Those properties that fail to keep up with the sustainability standards required by the market risk becoming obsolete, leading to the so-called "brown discount". Basically, it's a drop in the sales price or rental price, with negative repercussions for landlords and investors. As the vast majority of buildings in Italy are inefficient from an energy standpoint, green initiatives will be accelerated, with major sustainability-related redevelopments and transformations becoming essential for preventing a collapse in value.

The importance of investing in technology

Technology and data analysis are becoming increasingly crucial for the sector’s sustainable development. Implementing any ESG strategy in real estate starts with integrating modern technologies into the entire life cycle of the building, from due diligence to management. Consumptions, Co2 emissions, management methods, and impacts on the community all must be measured, monitored, and disclosed. Only by analyzing each performance of an asset will we be able to identify its strengths and weaknesses and come up with innovative solutions capable of creating value.

Far from being an option, the adoption of ESG principles in real estate today involves all stakeholders at all levels. The move toward sustainable development won't just benefit the world we live in. it'll also play a significant role in renewing a sector that's traditionally resistant to change.