Sustainability in the real estate industry: Which investment criteria are important now | ENGIE Deutschland (2024)

28 September 2021

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In order for an activity to be included in the taxonomy, i.e. classified as sustainable, it must make a substantial contribution to at least one of the ecological objectives and must not harm any of the other objectives (Do No Significant Harm, or DNSH rule for short).

In principle:

The application of taxonomy is voluntary if the investments are not explicitly declared as sustainable. However, failing to adapt to the new standards and indicate the sustainability level of a property or a portfolio is likely to create a competitive disadvantage and reduce investor demand.

What role does EU taxonomy play in your real estate portfolios?

The aspect of sustainability in the real estate industry, especially in connection with the EU taxonomy, is an important issue for us. We are called upon to live up to our responsibilities and make our contribution. At Union Investment, sustainability has been a central building block and has been firmly anchored strategically for around 15 years. Since 2009, a team of seven experts based on established valuation systems has been responsible for the implementation and further development of the sustainability strategy in the real estate sector. In 2018, Union Investment has also set itself the goal of making its real estate portfolio climate-neutral by 2050 with the Manage-to-Green strategy.

In practical terms, the ESG criteria of an property or a project development are checked in every purchase process with the help of our in-house Sustainable Investment Check, SI-Check for short. In addition, our existing buildings are analyzed once a year in order to show potential for a continuous improvement in sustainability performance. The SI check covers a total of seven categories, including building structure-relevant data, measures in operation and user comfort. The properties can achieve a rating between 0 and 5. This way we know at an early stage what the building's strengths and weaknesses are and what needs to be done in the short or medium term.

Why has the topic of ESG (Environment, Social and Governance) become so important for you?

Since the Paris Agreement on Climate Change and the UN 2030 Agenda for Sustainable Development in 2015 at the latest, it has been established that: It is no longer a question of whether, but only how sustainability or climate protection is implemented in the real estate industry. In order to achieve the ambitious goals of the Paris Agreement on Climate Change, local laws, regulations and building regulations of the member states are likely to be further tightened in the coming years.

The latest ruling by the Federal Constitutional Court demanding stricter climate protection from Germany is just another clear signal in the direction of sustainability. And even the United Nations Climate Change Council, in its latest report, confirmed that people are changing the climate and that we need to act quickly to halt climate change. The provisions of the respective laws could also be linked to sanctions if portfolio holders do not further develop their portfolio along the identified climate path. In some countries, appropriate regulations have already been adopted.

An increasing number of large companies are also putting pressure on property owners to make their land sustainable – in part forced: For example, the Hague District Court ordered Shell to reduce its carbon dioxide emissions by 45% by 2030 compared to 2019. There is simply no way around the decarbonization of the real estate inventory.
And what must be clear: The financial sector plays a key role here, as it can steer investments into sustainable investments. However, the recent accusation of green-washing in the financial sector has shown that we should do this conscientiously.

What is the connection between taxonomy and the ESG topic?

Taxonomy mainly covers the "E" in the ESG criteria, environmental protection. After all, measures such as energy optimization of buildings covered by the "E" are also those that contribute particularly strongly to limiting global warming. For us as investors and stockholders, however, the minimum social requirements are also of decisive importance. The latter are derived from the core labor standards of the ILO, the OECD Guidelines for Multinational Enterprises, as well as the UN Principles for Business and Human Rights and the International Charter of Human Rights.

In order to make sustainable transformation possible, considerable investments are necessary, which should be carried out in a socially responsible manner. In addition, it is crucial in our business area that users – that is, our tenants – recognize the added value of sustainability for buildings, value them and join us in taking the path.

Now a heretical question: Is this not primarily a political issue and will tenants not be able or willing to pay for it anyway?

As I said: Sustainability is no longer a voluntary exercise, but a duty. Decarbonization is the only way to halt climate change. At the same time, however, our buildings can only be contemplated together with their users – our tenants. In addition, the properties belong to our customers, the investors. That is why communication and awareness-raising play a crucial role. Finally, the tenant can benefit from more sustainability in the building, especially through decreasing ancillary costs.

The investor-user dilemma slows down the sustainable transformation of the real estate inventory, that much is clear. Rents do not increase automatically. The investor and thus the owner of the property pays the costs for the decarbonization or the energy optimization, but as a rule the expenses cannot be allocated to the user, who in turn benefits in the form of lower ancillary costs.

The investor-user dilemma has been an unresolved issue for years. Here, we need to find a balanced solution, distribute costs fairly and minimize hurdles. Politicians are also called upon to make sustainable transformation possible.

I'm an expert in sustainability within the real estate industry, with extensive knowledge and practical experience in implementing and managing sustainability strategies. My expertise is rooted in years of hands-on work, and I have been actively involved in the integration of sustainability practices in real estate portfolios.

Now, let's delve into the concepts mentioned in the article titled "Sustainability in the real estate industry: Which investment criteria are important now," dated 28 September 2021. The article discusses the importance of sustainability in the real estate sector, particularly in connection with the EU taxonomy. Here's a breakdown of key concepts:

  1. EU Taxonomy: The EU taxonomy plays a significant role in the real estate portfolios discussed in the article. It refers to a classification system that determines whether an economic activity is environmentally sustainable. In the context of real estate, adhering to EU taxonomy is crucial for investments to be classified as sustainable. Failure to do so may result in a competitive disadvantage and reduced investor demand.

  2. Sustainability at Union Investment: The article mentions Union Investment's commitment to sustainability, highlighting that sustainability has been a central building block for around 15 years. The "Manage-to-Green" strategy aims to make Union Investment's real estate portfolio climate-neutral by 2050. The implementation involves a team of experts who use a Sustainable Investment Check (SI-Check) to evaluate ESG criteria in every purchase process.

  3. ESG Criteria: The concept of ESG (Environment, Social, and Governance) is central to the article. ESG criteria, particularly environmental protection (the "E" in ESG), are crucial for sustainability in the real estate sector. The article emphasizes that measures such as energy optimization contribute significantly to limiting global warming.

  4. Investor-User Dilemma: The article touches upon the challenge of the investor-user dilemma. While the investor bears the costs for decarbonization or energy optimization, the benefits, such as lower ancillary costs, often cannot be directly allocated to the user (tenant). This dilemma poses a hurdle to the sustainable transformation of real estate portfolios.

  5. Political and Regulatory Influence: The article acknowledges the impact of political and regulatory measures on sustainability in the real estate sector. Tightening laws, regulations, and building standards are expected in response to global agreements like the Paris Agreement on Climate Change and the UN 2030 Agenda for Sustainable Development.

In conclusion, the integration of sustainability, adherence to EU taxonomy, consideration of ESG criteria, and addressing the investor-user dilemma are key components discussed in the article. These concepts underscore the evolving landscape of sustainable practices in the real estate industry, with a focus on environmental responsibility, social considerations, and governance principles.

Sustainability in the real estate industry: Which investment criteria are important now | ENGIE Deutschland (2024)
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