Europe a beacon, but it’s still work in progress on ESG rules

Europe is a beacon when it comes to ESG regulations but there are many issues still to be resolved, delegates heard at Real Asset Media’s Impact & ESG: Effective Strategies for Real Estate briefing, which was held online yesterday on the REALX.Global platform.

“All eyes are on Europe, there is great interest in the world because it is seen as an example of best practice and a blueprint for what can be achieved,” said Christiane Conrads, EMEA real estate ESG leader, PwC Legal.

Christiane Conrads, EMEA Real Estate ESG Leader, PwC Legal

EU regulation, including the Fit for 55 package, which aims to reduce greenhouse gas emissions by 55% by 2030, is driving the current transition phase and is having more of an impact on real estate.

“The ESG topic has moved up the agenda in the US as well, because European investors there only want to buy taxonomy-compliant assets and that’s created an interest,” said Conrads. “There’s been a noticeable change in the US approach compared to a couple of years ago and now the net zero target, green building certifications and other environmental targets are top of the agenda.”

The EU’s SFDR (sustainable finance disclosure regulation), which came into force in March 2021, aims to standardise sustainability disclosures and is aligned with the EU Green Deal to make the EU carbon-neutral by 2050.

Apart from the provision of sustainability-related information with respect to financial products, under SFDR the funds that are promoted as ESG are required to be classified as Article 8 or 9. The criteria are particularly stringent for Article 9, defined as a fund that has sustainable investment as its objective or a reduction in carbon emissions as its objective.

Stringent criteria versus tangible goals

“It would be very hard for us to do an Article 9 fund in the existing buildings fund,” said Jan von Mallinckrodt, head of sustainability, Union Investment Real Estate. “The regulations as they stand are too black and white and in practice they are preventing people from acting and pushing for transformation.”

Jan von Mallinckrodt

Real estate investment funds that want to make existing, poorly performing buildings greener would not meet Article 9 requirements, which are only met by investments that already qualify as sustainable.

These rules, that have just been clarified by ESMA, the European Securities and Markets Authority, can be disappointing for fund managers keen to upgrade stranded assets and to market their redevelopment strategies.

“In order to have a positive impact on the environment it would be better to go for Article 6 and transform an existing brown building into a green one,” von Mallinckrodt said.

Jaap van der Bijl, CEO, Altera Vastgoed, agreed that it is preferable to go for tangible goals: “If Article 9 is not feasible for many of the existing funds, then settle for 5,6 or 8. There are discussions throughout Europe about regulations. They are not perfect and it will take decades to get there, but SFDR is what will drive us forward.”

Rules will be modified and fine-tuned over time, but in the meantime real change is already happening on the ground.

What used to be good intentions and vague objectives have solidified into concrete targets and very clear rules. In the Netherlands, for example, office buildings need to have at least a C level certification by the end of this year or they will not be allowed to operate.

“Similar measures can be expected in the rest of Europe in the near future,” said Rogier Bos, real estate finance Benelux, Berlin Hyp. “In the office sector sustainability is always the first topic of conversation, especially in the acquisition phase, and you need to quantify the impact in order to assess the real quality of the asset.”