‘It’s becoming almost impossible to stay ahead of ESG regulations’

Regulations, designed to hasten the move to sustainable buildings, are increasing, making the situation more complex for many. Nicol Dynes reports. Photography by Karla Gowlett.

The property sector must prepare itself for an avalanche of ESG-related regulations and requirements, experts told IMPACT at a recent ESG, Digitisation, PropTech and Investment briefing.

Companies are trying their best to implement the changes, balancing the investments that need to be made with the imperative of delivering financial returns. However, it is becoming increasingly complex.

“We try to stay ahead of legislation by being proactive and improving our assets, but it’s becoming almost impossible to stay one step ahead,” said Clemens Brenninkmeijer, head of sustainable business operations at Redevco. “In the last two to three years there has been a huge amount of legislation in Europe and translating it into local regulations within the deadlines is proving to be a challenge.”

“There’s an element of frustration about all these new regulations coming out, which can be overwhelming,” added Oliver Kummerfeldt, head of European real estate research at Schroders Capital.

Jules Barker, WiredScore: ‘The effects of climate change are still not factored in, but we must build spaces that are resilient from floods, changes in the temperature and so on.’

The principles behind the legislation are simple. They aim for higher environmental and social standards, lifecycle analysis of assets, and a consistent methodology. But implementation is more challenging.

“The problem is that all these requirements are not harmonised,” said Christiane Conrads, partner and global real estate ESG leader at PwC. “Regulatory bodies are competing with each other for higher standards. Regulatory pressure is already huge and it’s only going to increase. There is a lot more to come – I expect a tsunami of requirements hitting us in the next few years.”

Avoiding stranded assets

The flip side is that the EU is a trailblazer in this field, while in the US, for example, discussions are just starting and it faces a steep learning curve. In Europe, all investors with a long-term horizon know they need a sustainable portfolio and can work out their own path to achieving that goal.

“People understand they need to make those investments or their assets will become stranded, and they know it will take time and resources,” explained Kummerfeldt. “People want to do the right thing and they also want to be seen to be doing the right thing.”

The investment necessary to make assets sustainable is substantial and the work is challenging, as there are so many facets to ESG. Asset managers need a team of people with different skills to implement ESG strategies – from law to climate, from engineering to technology and from energy to artificial intelligence.

Oliver Kummerfeldt, Schroders Capital: ‘People understand they need to make those investments or their assets will become stranded, and they know it will take time and resources.’

Too much focus on short term

“Sentiment is starting to change, but there’s still too much of a focus on the short-term return,” said Brenninkmeijer. “We should pool resources and work on transformation collectively, but it’s difficult to get everyone on board. Some owners want to do it, others are not interested or don’t have the money, which is why you need regulations to force change.”

The fragmented nature of ownership makes it challenging to implement even the best of plans, especially in cities, where interventions should ideally be at neighbourhood level, rather than limited to an individual asset.

“We want to make cities more dynamic and vibrant and we would love to transform a whole area at the same time, but the reality is that we can only work on our buildings,” added Brenninkmeijer. “We’re in the process of redeveloping 10 to 15 of our assets, adding residential to retail to bring life back to the high street, reusing and recycling all materials and using mass timber, but it’s really hard work. All it takes to stop it is a local fire chief who doesn’t want to sign off a timber structure because he has old-fashioned ideas and is not up to speed with technological advances.”

From ESG to ESGR

If regulations are becoming more numerous and detailed, it is because the problems they are trying to address are becoming more complex. Even setting aside social and governance issues, the environmental component is multi-faceted. The impact climate change will have on infrastructure and the built environment, for example, is only now becoming a subject of debate, but will no doubt appear on everyone’s radar soon.

“ESG is no longer enough, you need an R at the end for resilience,” said Jules Barker, global director of product at WiredScore, a company that assesses digital connectivity and smart technology within homes and offices. “The effects of climate change are still not factored in, but we must build spaces that are resilient from floods, changes in the temperature and so on.”

Christiane Conrads, PwC: ‘Regulatory bodies are competing with each other for higher standards. Regulatory pressure is already huge and it’s only going to increase.’

Excessive rainfall and disastrous floods have been seen in Germany and Italy, while southern Spain and other areas are forecast to have temperatures of 40 degrees and above.

“Climate change is already taking place,” said Conrads. “We’re going to see more floods and in Germany and other countries and the infrastructure is not ready. There is a lot to be done, and there are huge changes ahead between now and 2050.”

Protecting the environment should be basic risk management, but it takes foresight, planning and resources, which are all in short supply, especially at a time of geopolitical uncertainty and economic crisis. “In a recession it’s much easier to say that it can’t be done,” noted Barker. “The next few years will be tricky and critical.”

No silver bullet

Property industry professionals should not wait for a magic wand, but start doing what is already possible.

“Don’t expect a silver bullet technology to solve all problems,” said Barker. “Most of the technology we need we already have. But we need to implement it at scale and in a structured way.”

The real estate sector is moving from a stage of discovery to a state of implementation. Now it’s more about learning to use what is available and sharing knowledge and best practice. “It’s about cooperation rather than finding new technologies,” Barker said.

Clemens Brenninkmeijer, Redevco: ‘At Redevco we’ve spent a lot of money smart-metering our entire portfolio. We’re working with nine different tools when we need to have one.’

Like all ESG-related issues, a change of mindset is necessary before there can be a change in behaviour. “The real estate industry is still built on a combative approach, trying to offload risk on to another party instead of working together to build better assets,” added Barker.

Slowly but surely, things are changing. “Organisations like ULI are all about collaboration, sitting around the table finding good solutions,” said Brenninkmeijer. “It’s a process that will inevitably take time, but it has started.”

Sharing best practice is crucial, added Conrads, and “you should also share what hasn’t worked for you so that other people can learn from your mistakes as well as your successes. Collaboration is the new competition.”

Point of transition

The real estate industry is at a point of transition and it is crucial that it evolves in the right direction. Investments must be made not just in building assets, but in ESG and technology.

“By now people have grasped the concept that their assets will be stranded if they don’t act, but they’re not ready to take out their chequebook and invest a lot of money now,” said Barker. “The fact is that any ESG strategy has to be embedded in technology. You have to be able to measure, but most people have no idea what is happening in their buildings.”

The first step is collecting data, the second is knowing how to use it. And companies need help to develop viable strategies. “Unfortunately, no solution does all of that in one package,” said Brenninkmeijer. “At Redevco we’ve collected energy data for 12 years and we’ve spent a lot of money smart-metering our entire portfolio. We’re working with nine different tools when we need to have one.”

Technology is moving in the direction of unifying, combining and simplifying, but it is work in progress. At the moment “it is still like the Tower of Babel, all speaking different languages”, said Barker.

Landlords often don’t have access to the energy data of their buildings, even if the tenants are in agreement. “Energy companies’ data should be open source, but instead they protect their little patch,” said Brenninkmeijer. “There has to be acceleration on this, because we just don’t have the time.”