More ‘stick’ and less ‘carrot’ to achieve ESG progress in future

When it comes to ESG requirements the gentle nudge of incentives is fast being replaced by the hard push of sanctions and regulations, experts told Real Asset Insight.

Paul Oremus.

“Until now it’s been about subsidising good behaviour to encourage companies to comply, but now it’s veering towards penalising them if they don’t comply,” said Paul Oremus, fund manager, Dutch & European residential funds, CBRE. “In some European countries you’re not allowed to rent out office buildings with an energy label above C, so you’re forced to spend capex on upgrading them.”

In other countries there are even more extreme measures in place.

“In the Pacific area, which is taking the lead on these issues, there’s the neighbours methodology,” said Andy Hay, managing director EMEA property management, Colliers. “If certain thresholds are not met, the responsibility and the financial burden fall on the landlord. Apparently it has reduced the energy costs of office buildings in Melbourne to a third of the rates they have in London.”

Regulation will also have the benefit of bringing much-needed clarity to the sector, as currently standards vary and compliance is difficult to measure.

“Clarity on where ESG is going is absolutely critical, because ultimately it comes down to what’s happening at the asset level so we absolutely need to know,” said Hay.

Industry agreement on measurement could make an impact

“I would like the whole real estate industry to agree on a few types of measurement because then we would know where we stand, we could all talk the same language and really make an impact,” said Rutger Schuur, chief investment officer, ParkBee.

Stricter regulations are also being imposed from above. Germany’s climate protection law, for example, has brought forward to 2045 the climate goal of zero emissions, which was previously set for 2050.

The EU also has a clear focus on taxonomy regulations and its goal is to push people in the right direction, opting whenever possible for incentives rather than penalties.

“Looking at it from a global perspective, you can see that the EU is really moving at speed,” said Thomas Veith, partner, leader real estate/real assets, PwC. “In the US there is a lot of talk but no significant push yet, while the EU is a leader in really using regulation to move things along quickly.”

The EU has a theme and a goal to have more standardised regulation and a taxonomy framework because it makes sense, he said.