Real estate players run a huge risk of misinterpreting regulatory requirements around ESG. The Disclosure Regulation is simultaneously causing significant delays in the acquisition process, with half of market players saying due diligence checks are now more time-consuming than they were prior to the Regulation. Those are the key findings of a special study entitled “Risk Factor ESG?” which involved polling 117 real estate experts across Germany in spring 2022. The study was initiated by the European Real Estate Brand Institute and conducted in conjunction with Biberach University of Applied Sciences and Union Investment. It is the first such study to investigate what impact ESG implementation is having on the reputation and business models of real estate companies and to examine the risk factors involved.
“The current regulatory requirements governing the real estate industry’s efforts to help achieve the 1.5 degree climate target are rated as inadequate by nearly 60 per cent of the experts surveyed. ESG standards are widely accepted in principle within the industry, but real progress is being hampered by many unresolved issues. ‘Wait and see’ is not a viable option, though. The need for action remains extremely urgent,” said Jan von Mallinckrodt, Head of Sustainability at Union Investment Real Estate GmbH.
In addition to the risk of misinterpretation and the impact on investment behaviour, the study identifies two further major barriers to effective implementation of ESG standards in companies: higher overall administrative effort (37 per cent of respondents) and higher costs (30 per cent of respondents). According to the study, rising costs could be mitigated by improving and digitising processes, which would lead to efficiency gains in acquisitions and portfolio management. The study cites organisational responsibility for ESG issues as the second major action area. Implementation within real estate companies is currently spread across ESG departments, various working groups, external consultants and the senior management team. The study found that the urgency of ESG meant it was increasingly likely to be seen as a boardroom issue. A clear majority of respondents (60 per cent) regard ESG implementation as a core task for senior management.
“It’s encouraging that companies see earnings potential in ESG, albeit rather tentatively as yet" Jan von Mallinckrodt Head of Sustainability at Union Investment Real Estate GmbH
Impact on reputation and earnings potential
“Our empirical market observations show that this year ESG has become the strongest driver with the greatest influence on the positioning and reputation of corporate brands. ESG therefore remains a crucial factor,” said Harald Steiner, CEO of the European Real Estate Brand Institute.
However, ESG doesn’t only offer reputational opportunities. Some 29 per cent of respondents believe that systematic implementation of ESG is a positioning opportunity that gives them an edge over competitors. The real estate companies surveyed also see opportunities with regard to better financing terms for ESG-compliant properties (17 per cent) and higher employee satisfaction (14 per cent). “It’s encouraging that companies see earnings potential in ESG, albeit rather tentatively as yet. This is in line with our expectation that sustainability will increasingly be reflected in real estate valuations,” said Jan von Mallinckrodt.
The study also found that of the many topics the real estate industry needs to address, ESG is among those with the greatest potential to unlock future growth. “Going forward, the ability of providers to advise on these regulatory requirements will determine the competitiveness and viability of a business model in the real estate industry,” said Thomas Beyerle, a professor at Biberach University of Applied Sciences. The expectations and pressure are coming mainly from investment partners and institutional investors, and increasingly also from the public, the media and from companies’ own employees.
The “Risk Factor ESG?” study can be ordered free of charge by e-mailing sonderstudien@reb.institute.