The influence of ESG criteria on investment projects - additional obligation or new opportunity?

The consideration of so-called "ESG" criteria has now become established as a standard procedure for sustainable investments. They describe the three sustainability-related areas of responsibility of companies:

• "E" for Environment includes, in particular, climate criteria in the form of a company's energy and resource efficiency.
• "S" for Social includes aspects of occupational safety, consideration of human rights, diversity and social commitment.
• "G" for governance includes sustainable corporate management, which includes topics such as corporate values, supervisory structures and risk management.

Sustainable investments are increasingly becoming the focus of the real estate industry. In the future, ESG criteria will have an influence on the management of existing properties as well as on new real estate projects. In this article, you will learn which obligations in the area of ESG will apply to existing real estate projects and how the ESG criteria can also be used as an opportunity for investments.

Influence of ESG criteria on investments in existing properties / existing properties as an asset class

For existing properties, the importance of ESG criteria will increase more and more over the course of the next few years. Since the legislator passed the "Non Financial Reporting Directive" (NFRD) in 2014, corporations with a headcount of 500 or more are obliged to report on the sustainability of their company. The reporting obligation was implemented by the German legislature in 2017 in the CRS-RUG and has since been an integral part of the non-financial management report of such companies.

The importance of the "environment" factor for companies became apparent with the adoption of the EU taxonomy in 2021. From fiscal year 2022, companies must achieve at least one of six environmental and climate targets without violating any of the others. The EU Taxonomy regulation will also be included in the reporting requirements in the process. Consequently, many real estate companies are already affected by reporting requirements in ESG areas. Further reporting obligations will also follow in the future as a result of the adoption of the "Corporate Sustainability Reporting Directive" (CSRD).

Are ESG criteria therefore just another obligation and burden for real estate companies?

Many companies also use ESG criteria as an opportunity through sustainability assessments and ratings. To date, the Global Reporting Directive (GRI) and the German Sustainability Code (DNK) have established two assessment standards for evaluating the sustainability of a company. In-house rating agencies specializing in sustainability offer certifications for the sustainability of investment projects. The certificates enhance the value of real estate projects and thus attract more attention from investors.

Influence of ESG criteria on new projects

The majority of investors already take ESG criteria into account when investing in real estate.

KfW, for example, has been including a company's sustainability rating based on ESG criteria in its investment decisions for the liquidity portfolio since 2008. Therefore, not only economic criteria are relevant for the credit rating, but also sustainability, social responsibility and corporate governance enhance the company's credit rating. New real estate projects that meet the ESG criteria thus have a better chance of obtaining favorable financing and subsidies.

With the introduction of the EU taxonomy and the CSRD, major real estate companies will have to focus their reporting on ESG criteria from the outset. This means the focus for new projects will shift to consistent reporting in the future. The real estate industry must rise to this challenge and comply with the legal regulations. As further legal changes and extensions are expected in the coming years, it will become increasingly important to make investments ESG-compliant from the outset and to plan sustainably with foresight. Knowledge of the requirements of the guidelines and their application in practice are essential. DeepGreen Funding is available to provide advice and suitable recommendations for action.

Using ESG as a new opportunity

ESG criteria have thus taken on a key role in the strategic orientation of an investment project. To successfully implement a real estate project, ESG criteria must be applied to both existing properties and new real estate investments.

They represent another challenge for existing real estate projects due to the new reporting requirements, but the criteria can also be a new opportunity for possible funding. By offering sustainability ratings, existing projects can be upgraded and further developed. New real estate projects can be designed to be ESG compliant from the outset to meet future requirements, making the investment more innovative and attractive.

The ESG criteria are therefore an opportunity for the real estate industry in particular to make investment projects more sustainable and innovative right from the start of the planning process and provide many opportunities to enhance a project not only economically but also ecologically.

Sources:

https://wirtschaftslexikon.gabler.de/definition/esg-kriterien-120056

https://www.kfw.de/nachhaltigkeit/Über-die-KfW/Nachhaltigkeit/Nachhaltige-Unternehmensprozesse/Nachhaltiges-Investment/Nachhaltiger-Investmentansatz-der-KfW/Integration-von-ESG-Kriterien/

https://www2.deloitte.com/de/de/pages/real-estate/articles/esg-immobilienwirtschaft.html