Navigating sustainable finance: Key factors for the real estate industry

December 11, 2023

by André Bittner and Robert Radmilovic

Topics

Non-financial reporting, as well as disclosure and transparency obligations, are becoming increasingly important in Europe and Switzerland. ESG (environmental, social, and governance) and sustainable finance are particularly prevalent topics at the moment. But what exactly do these terms mean? And what is their significance in the context of real estate and its investments?

This article provides an overview of these topics, key facts, and their main drivers.

Sustainability and its main drivers

ESG: Sustainability in three dimensions

The ESG concept comprises three areas: environmental, social, and governance, which are represented by a large number of different indicators. These criteria are generally used to assess a company’s impact on the environment beyond its financial performance. ESG measures include topics such as resource consumption, diversity in the workplace, and corporate governance. By taking ESG factors into account, companies can make more informed decisions, reduce risks, and strengthen their reputation.

In the real estate sector, example indicators include CO2 emissions that a building emits and whether renewable energies are used to heat a property. Social aspects such as site location, accessibility, or user well-being can also be included as ESG KPIs (key performance indicators) to make these and other aspects quantifiable and traceable as part of an ESG rating. However, these three areas cannot always be clearly separated from each other, which results in overlaps. The sometimes complex question of the exact allocation of individual ESG indicators can also lead to discussions among industry players when it comes to prioritizing or weighing the various indicators or the effect they (should) have. In other words, which dimension should come first – E or S, S before G? For example, many institutional investors often pursue a sustainable approach when choosing their real estate investments, while at the same time taking profitability/return into account.

Sustainable finance: Sustainable financing

Sustainable finance (SF) is a generic term for the various forms of financial services that integrate ESG criteria into business or investment decisions, which must be closely linked to sustainability. In principle, it is about considering the long-term impact on the environment, society, and economic aspects when making financial and investment decisions. This also applies to the real estate sector, and can relate to investments in sustainable real estate funds, green buildings, or the choice of low-emission building materials. Here, topics such as circular economy and sustainable supply chain management are particularly important to consider.

SF affects not only the financial market itself but also a variety of real estate sectors like investment, portfolio and asset management, real estate development, sustainability-related loans or projects as well as sustainable, green and/or blue loans. The players involved in SF include a broad spectrum of institutional investors, such as banks, insurance companies, stock corporations, and pension funds, alongside real estate managers, consultants, and lawyers.

The drivers

Strategy: Sustainability is becoming an increasingly strategic aspect – and therefore a competitive criterion for investors and stakeholders.

Standardization: ESG standardization and measurement are required to implement goals and change current portfolios.

Performance: Increasing market demand for improved ESG performance and impact for individual properties and real estate portfolios.

Transparency: Sustainability engagement and transparency can improve a company’s reputation and brand value.
Reporting: ESG disclosure and reporting are becoming increasingly mandatory, particularly regarding improved ESG risk management.

In principle, the drivers behind the practical implementation of sustainable finance can be divided into three categories:

Intrinsic drivers can include the motivation to make one’s real estate portfolio or business (more) sustainable and thus contribute to an economically and ecologically sustainable environment.

Extrinsic motivators primarily include mandatory regulation, which places ever higher demands on sustainability. Examples of this include the EU taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the indirect counter-proposal to the Corporate Responsibility Initiative (CRI).

A combination of extrinsic and intrinsic drivers could be a request from a supplier or service provider to participate in a voluntary sustainability framework or initiative, such as the UNPRI, Carbon Disclosure Project (CDP), or Task Force on Climate-Related Financial Disclosures (TCFD). However, many of these initiatives, which are currently still voluntary, are likely to become mandatory in one way or another in the future. It is therefore advisable for companies to deal with these issues strategically and proactively at an early stage.

Overall, there is a clear trend in the financial and real estate market towards increasing sustainability requirements on the part of regulators, investors, and society. This includes:

Disclosure requirements for corporate and investment practices
Building emissions (and the corresponding stranded asset risk)
Social responsibility of companies in the form of corporate social responsibility (CSR)
Strategic topics, such as climate targets, and CO2 reduction paths at company, portfolio, and asset level
Resource management requirements (circular economy, biodiversity, etc.)

Conclusion: Why ESG and sustainable finance?

ESG factors and regulations are becoming increasingly important in the financial industry and the real estate sector. This also applies (gradually) to the building stock in Switzerland.

ESG criteria and drivers as well as EU regulations such as the EU Taxonomy, SFDR, and CSRD are essential foundations for future sustainable finance.

ESG frameworks like the TCFD and CDP provide companies with clear guidelines for the design, management, and disclosure of climate risks and opportunities, as well as other ESG issues.

Early and proactive engagement: Targeted strategy development, implementation, and monitoring of key performance measures/indicators to enable long-term success.drivers and EU

In a world increasingly affected by climate change and social challenges, ESG and sustainable finance are of growing importance in Europe and Switzerland. The introduction of non-financial reporting, disclosure, and transparency requirements aims to make the economy more sustainable and encourage investment in environmentally friendly projects (such as sustainable real estate).

The vast topic of ESG and SF harbors a multitude of definitions, frameworks, regulations, and guidelines, but also many opportunities for implementation. Investments in real estate as well as its development and management must increasingly take into account environmental, social, and governance factors in order to be considered “sustainable”.

As part of Europe, Switzerland has so far pursued its own agenda when it comes to promoting sustainable practices. Although Switzerland’s regulatory framework is still relatively open, some regulations (such as the ordinance on mandatory climate reporting and the self-regulation of AMAS) have already set the course for greater transparency and sustainability.

Overall, it is clear that ESG and sustainable finance are transformative forces in Europe and Switzerland, which hugely impact the financial and real estate sectors. Disclosing sustainability information will not only motivate companies to operate more responsibly but will also enable investors to make informed decisions and actively contribute to a more sustainable future.

Outlook: Regulatory developments

The regulatory landscape surrounding ESG and sustainable finance is dynamic and constantly evolving, including stricter transparency and disclosure requirements for companies and financial institutions as well as their products. These include the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD). In Switzerland, too, the first steps towards greater transparency and sustainability have already been taken, and it is expected that further regulations will follow. Companies should therefore prepare for these changes in good time and actively engage with the new regulations.

How can we help?

Thanks to our extensive expertise in the fields of sustainability and ESG, we are at your side in these areas. We act as strategic advisors, calculating carbon footprints and preparing in-depth ESG assessments for your properties to support the implementation of your sustainability goals. To do so, we rely on the vast knowledge and many years of experience of our sustainability experts. We also draw on extensive data through our in-house sustainability tools, such as Wüest Climate and our ESG rating. Our approach includes the sharing of specialist knowledge, whether through our Wüest Academy, public event series, or individual consultations.

If you have any questions or suggestions on the topics mentioned in the blog post, please do not hesitate to contact us.