Why Europe needs to adopt digitisation to successfully implement ESG

Digitisation is vital for ESG compliance, because it supports transparency, efficiency, standardisation, scalability and easy access. But what progress is being made across Europe, particularly in Germany, the UK, Netherlands and France? Petter Made investigates.

ESG compliance is increasingly important in assessing a property’s valuation and investment potential. Measuring a building’s ESG compliance is a challenge, and methodology varies from region to region. As different countries and markets address the ESG challenge differently, agile data management is crucial to achieving success.

Playing catch-up

The 2016 Paris Agreement, to pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels”, was signed by  196 countries, but these targets are under threat.

The battle to address the climate crisis is intensifying, and achieving net-zero carbon emissions is crucial to halting global warming.

The spotlight is falling on the property industry to play its part. This raises the question of how it can contribute to reducing emissions and identify the steps needed to put this into action.

ESG compliance lies at the heart of this. Organisations have to comply with metrics on environmental factors (companies are evaluated on their carbon footprint, energy efficiency, water usage, waste management and pollution control); social factors (companies are assessed on labour practices, employee relations, diversity and inclusion policies, human rights and community engagement); and governance factors (companies are evaluated on their corporate governance structures, board composition, executive pay, risk management and transparency).

Challenges in real estate

EU Taxonomy puts pressure on the commercial real estate sector to accurately measure its contribution to the global effort to reduce global warming. However, the sector is some way from a single data model and defining the key metrics for ESG.

Some of the practical challenges are:

• Property owners may struggle to collect accurate and reliable data on their ESG practices, due to a lack of internal data systems or difficulty accessing external data sources.

• There is currently no universal standard for measuring ESG compliance, making it difficult for property owners to compare their performance against industry benchmarks. This lack of standardisation can make it hard to report ESG performance clearly and consistently.

• Increasingly, companies running digital transformation programmes to improve their operational capability and the overall customer experience include some of the energy consumption data required to comply with ESG standards. But the extent of digitalisation of the ESG process varies across organisations and regions.

• Measuring ESG compliance can be a resource-intensive process, requiring investment in data collection and analysis and external consultancy services. Property owners may face financial constraints when trying to implement ESG measurement.

• With 35% of the buildings in the EU over 50 years old and almost 75% deemed energy inefficient, the cost of upgrading properties to ESG-compliant levels can affect a property’s value negatively and reduce its attractiveness to investors.

• With older buildings, deciding whether to sell an asset in its current state or invest in upgrading it to the required ESG levels is the subject of much debate. This needs access to accurate energy consumption and efficiency data to measure whether ESG compliance affects short-term returns but would be worth it in the long term.

• Some of the social and governmental aspects of ESG are measured using qualitative methodologies and research. For example, the extent to which a property company is involved in the local community would be vital to the social assessment, but it is hard to measure this objectively and compare it with other locations or organisations.

• Although Europe has a single target of achieving climate neutrality by 2050 and cutting greenhouse gases by at least 55% compared with 1990 levels by 2030, the implementation of these targets and the associated directives varies across EU countries and differs from strategies pursued in the UK and the US.

Germany

Germany is recognised as a leading nation when it comes to adhering to ESG regulations. In 2017, it became the first country to mandate ESG reporting for certain companies and, in 2020, it implemented the EU’s Energy Performance of Buildings Directive.

In January 2023, it raised the initial requirements for the allowable annual primary energy demand of new and existing buildings. Going forward, every new building must meet an efficiency standard of 55%, instead of the previous 75%. This is another significant step towards achieving the goal of decreasing net greenhouse gas emissions by at least 55% by 2030.

‘Achieving net-zero carbon emissions is crucial to halting global warming and the spotlight is falling on the property industry to play its part. ESG compliance lies at the heart of this.’

Furthermore, the government has pledged to achieve climate neutrality by 2045 and is investing heavily in renewable energy.

Germany has established numerous reporting standards that endorse ESG compliance, including the German Sustainability Code and the German Sustainability Accounting Standards. These standards offer guidance on ESG data collection, analysis and reporting.

It has adopted legislation that mandates large companies to perform routine energy audits. Companies listed on the German Stock Exchange must submit a corporate social responsibility report annually, outlining their social and environmental targets and accomplishments.

Their suppliers must comply with the same standards, even if they are located in a different country or jurisdiction.

Buildings in Germany require an energy performance certificate that offers information on the building’s efficiency.

The measurement of energy consumption has become increasingly digitalised in recent years. Smart meters are being installed in German households and businesses, with the government adopting legislation to ensure full roll-out across residential and businesses premises by 2030.

These meters provide real-time information on consumption and can help consumers to monitor their energy use.

Building automation systems such as Geze use sensors and control systems to monitor and control energy consumption, adjusting lighting, heating and ventilation as needed.

Many German companies use energy management software, such as Dezem, to track and analyse their energy consumption. The software typically collects data from smart meters and other sources and presents it on a user-friendly dashboard to help companies identify energy-saving opportunities and track progress towards energy-efficiency goals.

Several platforms in Germany provide data on energy consumption and production, such as the energy data platform of the Federal Network Agency.

These platforms provide access to data on energy consumption and production across different sectors and can help to inform energy policy.

The UK

In recent years, the UK has taken an active stance towards achieving ESG compliance. It established the Task Force on Climate-related Financial Disclosures to encourage companies to disclose their climate-related risks and opportunities.

Since April 2023, the energy efficiency regulations have been extended. Non-residential buildings with an energy efficiency rating below band E are no longer eligible to be rented out unless a statutory exemption is applicable or the building is excluded from the legislation.

The energy efficiency requirements for non-residential buildings will be raised further, with the British government targeting a minimum rating of band B for all rented non-residential buildings by 2030 and proposing an interim target of a rating of C by 2027.

In addition, the UK government has set a target of achieving net-zero emissions by 2050, encouraging numerous companies to establish their own emissions reduction targets. Several reporting standards in the UK provide guidance on ESG data collection, analysis and reporting.

The UK has taken significant steps to educate businesses and investors about the importance of ESG compliance.

The Financial Conduct Authority, the regulator, has issued guidance on ESG investments for financial advisers, and the London Stock Exchange has launched a sustainability education platform for businesses.

More organisations are digitalising the process of measuring and complying with ESG standards, using a variety of methods. Smart meters are being deployed throughout the UK in all households and businesses by 2025 to provide real-time energy consumption data.

Many commercial buildings now use energy management systems to monitor and control their consumption.

As in Germany, many companies use energy management software services to track and analyse their consumption.

The Netherlands

The Dutch government has implemented a range of policies and regulations to promote ESG compliance. It wants to reduce greenhouse gas emissions by 48% compared with 1990 levels by 2030, and achieve a 95% reduction by 2050.

This year, several new legal and regulatory requirements were implemented, indicating a clear trend towards increasing requirements.

One of the new requirements, mandated by the Buildings Decree (Bouwbesluit), stipulates that office buildings must have an energy efficiency rating of A, B or C, with certain exceptions for listed buildings or small offices. If an office does not meet the requirement, the municipality can stop it being used until the building achieves a rating of C or better. By 2030, all office buildings must have an energy efficiency rating of A.

‘Property owners may struggle to collect accurate and reliable data on their ESG practices, and there is currently no universal standard for measuring ESG compliance.’

The Netherlands has adopted several reporting standards that support ESG compliance, including the Global Reporting Initiative and the Carbon Disclosure Project, which provide guidance on collecting, analysing and reporting ESG data. To promote ESG compliance, the Dutch government, businesses and civil society organisations collaborate and form partnerships.

The Netherlands has also undertaken significant efforts to educate businesses and investors about the significance of ESG compliance, offering subsidies for businesses to improve their sustainability practices. Several universities in the country offer ESG-related courses and programmes.

Digital technologies have been instrumental in enhancing and streamlining ESG compliance processes in the Netherlands. Smart meters have now been installed in nearly every Dutch home and many companies use digital energy management systems to measure and manage consumption.

Energy management software is commonly used in many Dutch companies. The government encourages companies to use the Carbon Disclosure Project platform to report their environmental impact and climate-related risks in a standardised way. This platform facilitates data collection, analysis and benchmarking of sustainability performance.

France

France has been actively promoting and implementing ESG practices in recent years, both at the governmental and corporate levels.

In terms of environmental sustainability, France has set ambitious targets to reduce greenhouse gas emissions by 40% by 2030 (from 1990 levels) and by 75% by 2050.

The Energy Transition Law and its associated action plans have been developed to provide the country with the necessary tools to broaden its energy sources and bolster its efforts to address climate change.

This comprehensive approach encompasses various economic sectors and imposes mandatory energy objectives for renewable energy, transportation and housing.

France has introduced regulations promoting diversity and inclusion, such as the Gender Equality Index and the Law on the Duty of Vigilance. Additionally, the country has implemented measures to improve labour standards, including increasing the minimum wage and strengthening workers’ rights.

At the corporate level, many French companies have adopted ESG policies and practices, and investors in France are increasingly considering ESG factors when making investment decisions.

France has made impressive progress in digitising the ESG compliance process, especially in the corporate sector. Various initiatives have been introduced to enhance transparency, efficiency and sustainability. For example, from this year, all households must have a smart meter.

Several ESG rating agencies, including Vigeo Eiris and EthiFinance, are based in France and use digital tools to assess companies’ ESG performance. To create ratings and rankings, these agencies gather and evaluate data from various sources, such as company reports, news articles and social media.

Large companies with a turnover of more than €100 million and which are listed on the French stock exchange must submit a corporate social responsibility report annually, detailing their social and environmental achievements.

Suppliers must sign up to the standards the company sets, even if they are from a different country or jurisdiction.

French companies increasingly employ digital tools to evaluate their sustainability performance and identify areas of improvement. For example, Schneider Electric uses EcoStruxure, a digital platform, to manage energy consumption in buildings and industrial facilities.

Haphazard progress

The analysis above indicates that while all countries share the common goals set out in the 2016 Paris Agreement, they all have different strategies and methodologies to achieve those targets.

Most leading economies are making progress in implementing programmes to reduce energy consumption and greenhouse gas emissions, but they are at different stages.

The social and governmental aspects of ESG, which are more qualitative in nature when it comes to measurement, vary considerably from region to region.

Digitisation is crucial

One common theme is that the processes for measuring ESG compliance are increasingly being digitalised.

Digitisation is vital for ESG compliance, because it supports transparency, efficiency, standardisation, scalability and easy access, all of which are essential for ensuring that companies achieve their sustainability objectives and commitments.

Digital tools can enhance transparency and accountability by providing stakeholders with real-time data and insights into a company’s ESG performance, allowing them to make informed decisions and hold companies to account for their sustainability practices.

Digital certificates, which are vital for compliance, can be stored and accessed easily.

Digitisation can simplify the ESG compliance process, enabling companies to collect, analyse and report on this data with greater ease. This can save time and resources, allowing companies to concentrate on enhancing their sustainability performance.

Digital tools can assist in standardising ESG reporting, making it easier for companies to compare their sustainability performance with their peers, and enabling investors to evaluate the sustainability risks and opportunities associated with various companies.

Digital tools, such as Drooms Data Rooms, can make it possible to scale ESG compliance across large, intricate organisations with numerous locations and supply chains. This guarantees that sustainability standards are consistently maintained across the entire organisation.

Petter Made is senior vice-president of product and development at Drooms