Deeper green

Green projects
Environmental, social and corporate governance issues, otherwise known as ESG, are having an increasing influence on business decisions – including in the real estate market. At the moment, however, there’s little consensus over what this concept actually entails

Real estate, like most business sectors, has always had an overwhelmingly commercial approach. However, the attitudes of businesses and business people have slowly begun to change – and the emergence of ESG principles in the market has been a powerful stimulus for this trend. In particular, EU governments and international development companies have become convinced (and are now attempting to convince others) that it is not only their own immediate surroundings that can be transformed by assets operated in accordance with the ESG ethos.

According to an article on ESG written by Filipa Belchior Coimbra and Francisco da Cunha of Deloitte’s Luxembourg office: “The awareness is growing that real estate can have a significant social impact, either in the form of the rehabilitation of public space (indirectly adding value to existing real estate), affordable housing, social housing and care centres, or through environmentally focused investment in new assets, such as green buildings.”

The rise of ESG has in turn been fostering the emergence of other standards, such as the adoption of codes of ethics and climate targets. The pandemic has also quite unexpectedly helped promote the ESG concept, since although many organisations still see making money as main thing, the good of society, the environment and indeed their own employees has also clearly been added to their list of priorities. Many companies have started to take a closer look at the ideas embodied by ESG and are now considering introducing them to their own operations. But this is no simple task, if only because in such organisational matters there remains a great deal of leeway as well as a lack of any universal standards.

A whole spectrum of possibilities

The problems begin with the acronym ESG itself, which is very often confused with CSR, even though the two concepts have little in common.

“CSR requires ethical activities, often of the moment, and are quite often undertaken by companies just for marketing purposes. ESG, on the other hand, encompasses every aspect of running a business and even takes into account a firm’s strategic goals,” explains Adam Targowski, the environmental director of Skanska’s commercial development business unit in the CEE region.

Another problem arises when it comes to standardising and formulating the ESG principles adopted to direct the activities of a firm. There is no one simple system such as there is for green certificates to define the boundaries and specify what actions are required and which are unnecessary.

“Much depends on the regulations of the country where a company is registered or on the stock market where its shares are traded – the rules for assessing and reporting ESG activities are highly varied, which means that there are as many interpretations as there are companies. It’s true that these principles are more or less aligned, but the lack of a standardised norm leads to a fair amount of uncertainty and sometimes even a total mess. The reporting is carried out using a variety of systems that often cannot be compared to one another, and this has unfortunately resulted in a loss of drive and impetus in the development of this field,” claims Adam Targowski.

There are signs, however, that the end is in sight for the chaos that currently reigns. INREV (the European Association for Investors in Non-Listed Real Estate Vehicles) has laid down sustainable development guidelines for those looking to implement ESG principles. Research carried out annually by GRESB (Global Real Estate Sustainability Benchmark – an organisation that was originally restricted to the real estate market) is also growing in importance. This provides comparable data on ESG activities and a reporting system that can be used by stock market listed real estate firms as well as private funds, developers and investors operating in this market.

A little can go a long way

It might seem that large corporations have a monopoly on ESG, but nothing could be further from the truth. In fact, the concept is not the exclusive domain of corporations, large or small.

“This can be seen from something that happened in The Netherlands. A group of around 17,000 Dutch citizens decided that the ESG policies of one particular petrochemical company were not rigorous enough and so they took the company to court. Recently the highest court in Amsterdam ruled in their favour and now the firm has to submit its plans for ratification and apply the Paris Climate Agreement. This is the first case of its kind. It would be harder to find more solid proof that ESG has a strictly societal function and that society itself has a huge influence on it, even when it comes to the relations between individuals and a corporation,” points out Adam Targowski of Skanska.

According to him, it is Western European and Scandinavian countries that are leading the way in implementing ESG, but many CEE countries now have aspirations to follow in their footsteps, having been mainly inspired to do so by the international companies that operate in those parts of Europe.

Maybe you’re already halfway there?

The question is: where to start when trying to implement ESG? The advice of Skanska’s director is that it’s best to look into whether a company’s procedures already have an impact on ESG factors. It might turn out that many of these principles have already been implemented.

“For a good few years now, Skanska has been implementing procedures aimed at improving the environment, our social responsibility and our corporate governance. And since we are listed on the Stockholm stock exchange, we publish a report every year on our sustainability activities. We also actively support organisations that promote ESG and – in a more visible way – we certify all of our projects under the LEED, BREEAM and Well systems. These activities are dictated by the climate goals we announced in 2019: by 2045 the Skanska Group will have achieved climate neutrality for its own operations, its supply chain and for the buildings it develops,” insists Adam Targowski.

Because it pays off

The high standards of ESG are also highlighted in the report ‘The 100 Most Important Trends in the CEE Economies’ prepared by Skanska in cooperation with analysts SpotData. The growing interest in ESG standards shows that they will determine to an increasing extent the shape the market takes in the future, as well as property valuations. As with green certificates, investors will base their purchasing decisions on whether the seller has implemented ESG principles and whether the property was developed in accordance with them. Even though there is still a lack of clarity in this area, the experts are convinced that it will be worthwhile putting up with all the teething problems in this area for now, because implementing ESG principles, at the end of the day, is certain to be beneficial for every company.

“It’s not just a question of being able to sell properties at higher prices. It also means gaining access to cheaper financing. One global financial institution is already offering lower lending costs to real estate developers as long as their project is developed in line with ESG principles. The higher the ESG appraisal, the lower the lending rates are. It’s only a matter of time before this becomes standard practice in Poland,” explains Adam Targowski.