ESG in the DNA

ESG stands for Environment, Social Responsibility and Governance. From the sheer scale of their declarations related to this, you might think that many companies simply have it hard-wired into their DNA – and indeed, many developers in recent years, with those active in Poland being no exception, have taken on many activities that are in line with this idea. “The office and retail sectors have probably been better at implementing ESG policies in their properties over the last five to ten years,” claims Jeremy Cordery the COO of MDC2. As he goes on: “I would say that you could regard industrial developers in some way as the poorer cousins. That is now changing, but there is some catching-up that industrial developers have to do.”

Global warming and asset value

Climate change, the Paris Accords and the European Green Order have all been playing an ever-larger role in ESG policy. The environmental aspects of ESG are of crucial importance when it comes to the warehouse sector, as well as for the entire construction industry, which accounts for around 38 pct of carbon dioxide emissions globally. You have to bear in mind that ESG is also a tool for assessing and changing a company’s environmental impact. “We have a global warehouse portfolio of 92 mln sqm and through those buildings pass goods worth 2.5 pct of the world’s GDP. In managing such a large portfolio, which makes up part of the global supply chain, we have got to be fully aware of our effects on the environment,” admits Paweł Sapek, a senior vice-president and the regional CE head of Prologis.

The need to address climate change is also being recognised in the declarations made both by governmental authorities and companies. “Money is becoming more responsible. Investment funds now have core ESG requirements – and not only for their higher-level company policies. Also, fund managers are being compensated for implementing sustainable policies with their investments. Investment is a key part of the solution. However, I don’t think that this is the only way. We have decided at MDC2 to make ESG a core part of our business,” reveals Jeremy Cordery.

Money and ESG policy are not only connected at the financing level for new projects. Buildings that are constructed in line with sustainable practices simply command a higher price than those that don’t meet such standards and, over time, that difference will widen. “Even today investors and tenants are looking to allocate their resources in accordance with the principles of sustainable development. Pressure is also growing from investment funds – for some of them sustainability is a requirement that must be met before they acquire a building,” explains Emilia Dębowska, the sustainability manager at Panattoni.

Sustainability, social responsibility and certification

For the warehouse sector, ESG cannot be uncoupled from the issue of green certification. The most popular certification system in Poland is BREEAM, which takes into consideration many different factors but has a strong environmental slant. Nonetheless, it also assesses health and well-being factors and building management issues, which means that it represents quite an effective test of general ESG principles.

This year the Polish Green Building Council (PLGBC) published a report on how much has changed in the warehousing sector. From March 2019 to March 2020, 86 buildings were certified, representing a rise of 78 pct. More and more companies are making declarations that not only that they will certify their buildings but that they have also set themselves the task of achieving a minimum rating. One such company is MLP, which has announced that all of its new buildings will have a BREEAM rating of at least ‘Very Good’. The developer has also set itself the goal of reaching zero emissions within two to three years. MDC2, which has only just become active on the warehousing market, is to develop buildings with

a minimum rating of ‘Excellent’.

“We devised the concept of ‘Go Earthwise with Panattoni’ over two years ago to lay out new standards for our developments: they must be environmentally and worker-friendly and also support the local community,” explains Emilia Dębowska of Panattoni. “One result of the decision was the introduction of BREEAM certification for our projects. To date, we have certified buildings with a combined area of 5.7 mln sqm. The solutions used by Panattoni mean that we can already reduce carbon dioxide emissions by over 230 tonnes a year for a 10,000 sqm building – and this figure is set to grow as more and more renewably-sourced energy is used. In this year alone, 3 mln sqm of our buildings was powered with renewably-sourced energy,” she states with some pride.

Despite the speed of change, only around 28 pct of total modern logistics space stock has been certified, according to the PLGBC. Such activities are also required in the modernisation of older industrial buildings. One example of a company doing this is MLP, which has announced that by 2023, all of its older buildings will have a BREEAM-In-Use certification with a rating of at least ‘Good’. Prologis, which has been certifying its buildings for more than 13 years, has set itself a new goal: all of its buildings worldwide are to be certified, either during the development process or when they are revitalised.

“Certifying buildings is the most common and trusted way for a developer to demonstrate that it is fulfilling its ESG commitments,” claims Marcin Malmon, the associate director for the real estate and advisory team at KPMG; “We’ve been seeing this trend for several years, mainly in the activities of building owners, but lately tenants have also been intensifying their ESG activities. It’s not uncommon for their corporate policies to dictate that their new offices or warehousing facilities should be in buildings that meet the highest ESG standards. Under such circumstances, certified buildings have become the natural destination for those looking for new space,” he adds.

Sustainable tenants

But are all tenants willing to pay for higher standards that meet certification requirements or other additional ESG requirements? Even when developers insist that certification guarantees lower building running costs?

“In the CEE region, green construction is not as advanced as it is for the projects that Prologis develops in the UK, the Benelux region or Germany,” explains Paweł Sapek. “Poland continues to be seen as a low-cost country when it comes to logistics and its rent levels, but how a warehouse operates has a huge effect on the environment. That’s why we spend a lot of time educating our clients. We’re pleased that more and more of them want to invest with us in low-emission solutions, examples of which include our joint developments at Prologis Park Janki and in Ruda Śląska. Construction norms are also helping us catch up with the West, since they result in greater and greater energy savings. It’s just a question of time before we develop a completely passive building in the region, such as the one that Prologis already has in its Dutch portfolio,” he adds.

NREP’s subsidiary Logicenters, which entered Poland this year, intends to introduce its parent company’s high Scandinavian standards to the country. Karin Sjövall, Logicenters’ head of sustainability, argues that it’s not just in Poland that the situation is far from ideal. “Even in Scandinavia, the average tenant wasn’t ready for ESG until recent years. Now we can see a few tenants who are interested in and willing to pay for ESG solutions, but it’s still far from what we want within our organisation,” he admits.

Jeremy Cordery has also seen that tenants are paying more attention to ESG, but also suggests why. “This is probably being driven by their boards, who are having discussions with their investors about how to make sure they meet the criteria of ‘keeping on a good relationship footing with our banks and our investors’. The 3PL market, which has traditionally not really examined ESG in very much detail, is changing,” he explains.

Attracting and holding onto talent

What exactly is a project developed in line with ESG principles like? Well, it’s a well-insulated building lit with LEDs and with effective management systems for waste, water and electricity. It has solar panels on the roof and is surrounded by greenery – meadows rather than lawns. It also has windows to provide workers with natural daylight, as well as high quality common areas.

Jeremy Cordery also points to another important factor for tenants: “Those are the HR issues. Companies also have to take into account that younger generations are now coming into work. Their perspective on the world is totally different – they care deeply about the future and the environment. The design of our projects includes a wellness package – with wildflower meadows, beehives and on-site gyms for workers to have the opportunity to spend some quality time outdoors engaged in activities with their colleagues and people from other companies,” he explains.

“Investing in sustainable buildings with low emissions is very important, but it’s only one aspect of ESG,” argues Paweł Sapek. “Social responsibility and ethics are also equally important in running a business – and, in this regard, we also want to support our clients. One example of this is finding and holding onto staff. Theoretically, Prologis as the owner of the property doesn’t need worry about whether a client has easy access to the labour market, but these days a warehouse can’t just be a building with road access. Based on our European experience, we’ve come up with a concept we call Parklife. This entails that we create properties that are employee-friendly, starting with the working conditions within the warehouse building and going on to improving the access to the park and adding outdoor recreational and relaxation areas,” he reveals.

Investing in forests and the future

Developers are not just limiting their activities to developing their own projects. “Our ESG goals already include a commitment to achieving CO2 emission neutrality in our construction processes by 2025,” insists Paweł Sapek of Prologis. “Just as we do in Western Europe, we offset unavoidable emissions, for example, by working with Cool Earth. As a result, as we build warehouses in the CEE region we are able to conserve around 780 ha of rainforest,” he adds.

NREP, on the other hand, is proud of its innovative green technology created through its tech fund, which forms part of Denmark’s Green Future Fund. “NREP launched this in 2021 as a green tech fund investing mostly in start-ups, which we believe have the potential to change the market. One of its investments was in a company called Carbon Cure – a concrete manufacturer that uses recycled CO2 as a strengthener. This technology not only captures and stores CO2, but also reduces the carbon footprint of concrete. Other examples of its innovations include carbon tracking and data warehousing for carbon emissions,” explains Karin Sjövall.

Local communities and corporate responsibility

Warehouse developments can provoke conflicts with local communities due to the increased traffic, the noise and the way they swallow up green space. As a result, developers often endeavour to be good neighbours by working, on the one hand, to lessen the impact of the development, and on the other by trying to make it beneficial for the local populace. “We allocate EUR 25,000 for each project we develop for different types of social and charitable causes. This involves not just putting money into something, but also creating a link with the community,” says Jeremy Cordery. However, MDC2 is not the only developer to engage with local communities. “We undertake many different activities to minimise the negative effects of our business and we go way beyond our responsibilities as laid out, for example, by the law. Panattoni works to help local communities by, for instance, helping with access to education, contributing to setting up art galleries and redeveloping the roads of the towns in which we operate,” explains Emilia Dębowska. One such example is the development of the Hub complex in Łódź, for which Panattoni privately rebuilt ul. Jędrzejowska. “We installed lighting pavements and also a bus stop as well as other street features to make it resident-friendly. Panattoni also planted many replacement trees across Łódź. We established a buffer zone behind our buildings and took the decision not to develop further on our plot and so we left an area of forest. We created embankments along the Hub to separate potential residential land from our site. We also reclaimed some of the land. On part of our site there was a mound of construction waste where the ground was contaminated – and to this day there’s still rubbish there,” reveals Emilia Dębowska.

Many Polish warehousing parks are being built on brownfield sites. Just developing such land can often be a change for the better, since they bring old derelict industrial sites back into use. For Accolade, a Czech investor that works closely with Panattoni, brownfield sites represent up to 53 pct of its portfolio. Developers like Hillwood and Panattoni also build on such sites. “For quite a few years, 35 pct of the space handed over each year has been made up of brownfield projects – and that’s a solid figure,” claims Emilia Dębowska.

Profits and non-financial reporting

Green certificates are nonetheless not the only way of measuring the implementation of ESG principles. Non-financial reports also provide a source of such data. “We have our annual public sustainability report and we do our investor reporting according to the GRESB,” points out Karin Sjövall of Logicenters.

For the last 15 years, Prologis has also been reporting the goals it has achieved using the Global Reporting Initiative’s guidelines. “We have measurable evidence that over the last four years we have reduced greenhouse gas emissions in our parks by 37 pct. This is the same effect as removing almost half a million cars from the streets,” claims Paweł Sapek.

The problem is that not all companies are obliged to provide such standardised reports. The Warsaw Stock Exchange, together with the European Bank for Reconstruction and Development, has produced a set of guidelines for non-financial reporting, and according to KPMG a total of 35 stock exchanges across the globe have done the same.

“At the moment only a few real estate companies are obligated to publish such information, since they are either large listed companies or alternative investment funds. It’s still rare to see non- financial reports published by developers. Nevertheless, the first commercial developers have started reporting on their sustainability. We expect their numbers to increase over the coming years,” believes Klaudia Kowalczyk, a senior analyst in the deal advisory department at KPMG. “More investors are demanding clear information about ESG as they need this for the value of their assets to grow or to be maintained over the longer term. In investment analysis, it’s crucial to get to know all the different kinds of risk – and that includes ESG, which can potentially cause their portfolios to lose value,” she adds

Values and action

ESG seems to be just a collection of ideas and values, however, it also encompasses factors that have a financial bearing, factors that can decide on the success or failure of a business. “We are convinced that ESG is the only way forward, but we have to make sure that our underwriting model works. Cases with longer horizons are easier to work with than shorter ones, assuming, among other things, that all these investments are going to translate into higher rents or greater risk mitigation,” insists Karin Sjövall. “I’m convinced that a good, sensible ESG strategy provides a competitive advantage, but it would not be true to state that a company can expect better financial results just because it has started to take account of ESG factors,” argues Emilia Dębowska of Panattoni, who adds: “When it comes to the CEE region and Poland, the adoption of sustainability has been proceeding slowly, although the industrial building sector has made huge advances over the last two years. I’m also in no doubt that the importance of ESG reporting is going to grow over the coming years.”