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Insights from PropertyEU’s ESG Roundtable – Part 1

By February 15, 2022No Comments

PropertyEU hosted an environmental, social and governance roundtable on 3 February 2022. The speakers were entrenched property players covering different sectors of the industry. We will be discussing the trends raised in the roundtable, and part 2 of our article will explore possible opportunities these trends suggest may be exploited in South Africa.

The Speakers

  • Mileway – a 2019 start-up funded by BlackRock with fifty million square metres of last mile logistics space and 11 000 tenants,
  • Savills – a global real estate service provider with 600 offices world-wide offering specialist advisory, management and transactional services,
  • Cromwell Property group – a real estate investor and fund manager,
  • Drees & Sommer – an international consulting company working in the building and real estate sector specialising in development and process consulting, infrastructure consulting, project management and engineering, and
  • Hollis Global, an independent real estate consultancy with a global outlook focusing on Europe.

Yes, the above is proper PR speak but these guys know their stuff.

The End User

Every one of them confirmed that the end user is the central driver of the movement to reduce the impact of the built environment on emissions. Tenants, fund managers, pension trustees, investors and the ordinary buyer are demanding that properties are sustainable, efficient and future proofed. Legislation and regulation in the EU is propelling the move to sustainability, but the real power lies with the end user. Cromwell is beginning to see real pricing dislocation between properties with and without ESG policies in place and, according to Drees Sommer, doing nothing has become a risk. You will not be able to sell a real estate asset that isn’t compliant with EU regulations.

Discussions around the UN’s sustainable development goals and the Paris climate accord acknowledged their roles in driving awareness of sustainability but morphed into the fact that sustainability has moved from being an option to being a both a duty and a legislative requirement. Investors in the developed world have admirably stepped up recently, demanding ESG initiatives from all asset classes and increasingly making access to, and the pricing of, finance dependent on ESG maturity.

The Three Pain Points

All agreed that there are three major pain points currently dominating the EU landscape. Data, the regulatory jungle and the plethora of certifications available.

Data:

Firstly, data is very difficult to gather, especially historical data from newly acquired assets and, given the fragmented nature of the scoring and target setting systems, it is very difficult to compare and correlate. The same sustainability path can score differently on different systems, so it become taxing to choose which sustainability path to follow. In addition, many of clients are trying to do better than the legislative requirements. The problem here is that they may be setting their targets on data that is essentially inaccurate or incomplete.

Regulations:

Keeping up with legislative changes and different requirement across all EU territories is tough. In terms of assessing a portfolio, comparability of data is clearly problematic. All ESG professionals are longing for the day when we have only a few global standards to keep track of and implement. It is heartening to note the work being led by IFRS and the Value Reporting Board in this respect. It will, however, take time for sector-specific global standards to be agreed upon.

Certification:

Certification, and the multitudes of certifications available, poses conflicting issues. Most participants agreed that belief in the value of certification has waned because of the relative ease of securing them from multiple bodies and especially for ‘operational net zero.’ Often, green building certification doesn’t signify true sustainability, and some accretive sustainability efforts don’t have certification. They questioned the prominence of energy and whether this had merely become a compliance calculation.

They also posited that there was a disconnect between Energy Performance Certificates (EPCs) and Breem, the EU certification council. All participants seemed fairly eager about helping to move the EU away from mostly focusing on EPC levels, towards considering circularity and biodiversity in addition to waste and water as emission reduction mechanisms. The consultant from Drees Sommer went far enough to suggest that it was high time to phase out carbon compensation. He said that everybody needs to actually get down and do the nitty gritty, sometimes expensive work, to reduce emissions through all available channels.

The Necessity of 3Rd Party Recognition

The opposing point highlighted by Mileway was that you have to have independent 3rd party recognition. What else would you do in a transactional or investment situation to verify the data you’re presenting? Hollis, which does certifications, said that you need to carefully choose which certification is suitable for each project and obtain them from reputable bodies.

In South Africa, the Green Building Council provides certifications. Despite the fact that the Council is sponsored by companies that may have vested interests, it is doing a great job in stimulating green investment. This is of course far easier to do for new builds than retrofits. Interestingly, the participants all agreed that there is currently less financial support for taking old real estate stock and converting it. This is a big problem given that 85% of existing EU stock will still be around in 2050 according to Savills.

Technology

The final discussion topic on the webinar was technology. Low carbon carpets, low carbon concrete. Despite this sounding rather mundane it definitely is not. Innovation is driving some exciting applications in the materials used in the real estate sector and South Africa has innovators that are doing interesting things with respect to traditional products, the use of waste materials and plastics, and even hemp.

Issues to consider for the South African market may be looking at working with the Green Buildings Council to formalise data requirements for certification beyond the traditionally commercial space. Those who’ve invested in ‘greening’ their residential properties would surely appreciate formal acknowledgement? We should also be hunting for and financing suppliers of low carbon materials.

Please stay tuned for part 2 of this article that explores possible opportunities these trends suggest may be exploited in South Africa.