ESG – a new way of doing business – highlights of necessary areas of transformation
By Paulina Pawłowska, legal advisor, the Real Estate Practice at Baker McKenzie
In the EU, new legal acts are regularly adopted, which are either directly applicable in the legal system of the member states, including Poland, or are legal acts that require implementation into the legal system of a Member State, in particular through the adoption of laws. Therefore, an ESG-compliant real estate business cannot be limited only to the verification in respect of national regulations, but it is particularly important to monitor in advance emerging legal acts at the EU level, as well as draft Polish laws that will implement them, and to reflect them in long-term business plans and individual ventures. Monitoring of regulations and their drafts will allow for adjusting business plans and making any adjustments that will allow for optimizing business operations while maintaining compliance with regulations in the field of ESG issues (environment, social responsibility and corporate governance). It is worth noting that before the launch of the European Green Deal, ESG issues were largely an area of marketing activities, while now ESG is becoming a matter of compliance, especially with EU regulations.
Legislative actions taken at the EU level mean that ESG is not a temporary trend that can be responded to by marketing activities, but it is a matrix of many issues that will determine the way of doing business and which will only gain in importance – especially for real estate market.
In particular, in the near future, we expect legislation on the transition to a circular economy, pollution prevention and control, the protection and restoration of biodiversity and ecosystems, and the sustainable use and protection of water and marine resources. All of these will affect real estate companies. Ultimately, it is planned to introduce a separate emissions trading system for the construction sector, and changes within the scope of business activities causing greenhouse gas emissions in connection with the use and change of land use. A review of the Renewable Energy Directive is also planned, in particular to increase use of renewable energy in buildings. EU regulations on construction/demolition waste (which accounts for more than a third of all waste generated in the EU) may be important for many entities operating in the real estate industry. In addition, within EU legislation, we expect further legal acts to transform the real estate sector, towards a circular economy to prevent climate change. The issues of the European Green Deal also include regulations in the area of social responsibility and corporate governance, which will be developed.
In turn, in 2023, the Corporate Sustainability Reporting Directive entered into force, concerning ESG information that companies will have to report. Companies subject to these obligations will have to report in line with European sustainability reporting standards. Twelve drafts of these standards have recently been published and should be adopted this year. Importantly, the new regulations will require not only the adoption and implementation of a reporting strategy, but also an understanding of the broader implications of the new regulations for business operations and their transformation, where necessary. Further proposals for legislation are planned in the EU to combat greenwashing.
Due to the increase in investors’ demand for investment funds that are connected with environmental, social and corporate governance issues, EU institutions will require to effectively apply sustainable development criteria. To this end, work has already begun on the development of guidelines on the names of funds using “ESG” or terms related to sustainable development and impact funds. They are due to be released later this year after consultation and are generally intended to link the fund’s name, investment characteristics and its objectives by disclosing the minimum percentage of investments up to the threshold indicated in the guidelines, in order to promote sustainable investment while avoiding misleading and greenwashing and to increase the confidence of investors and potential investors.
In addition, important issues for the real estate sector concern the emissivity of buildings, which are increasingly discussed in public. To step up efforts to deliver on the European Green Deal, the Commission has put forward proposals for a law to amend, among others, the Energy Efficiency Directive. The changes include increasing the annual energy saving obligation to 1.5% for all Member States.
Member States will be required to report on energy efficiency investments, including concluded contracts for energy efficiency improvement. Renovation of existing buildings to ensure their compliance with the objectives of the European Green Deal will also be an important challenge for the real-estate sector. The EU is also working on amending the laws pertaining to energy performance of buildings to meet the EU’s decarbonisation targets and on adopting new regulations relating to zero-emission building, nearly zero-energy building, renovation types, life-cycle global-warming potential of buildings and mortgage portfolio standards to encourage mortgage lenders to improve the decarbonisation of their real-estate portfolio. It is also planned to improve the already existing regulations on energy performance certificates and the harmonised conditions for placing construction products on the market.
Currently, the process of reviewing key legislative documents is underway and it is planned to expand regulations in order to implement the European Green Deal. For real-estate businesses, it is crucial to monitor the new regulatory environment outlined above, not only regarding reporting (most often associated with ESG issues), but also recognising the implications of new draft regulations for their activities. This translates into taking action to transform the business, when adopting the ESG and sustainable development issues as the main paradigm of doing business.
In coming years, new regulations will be subject to adjustments needed to adjust the implementation of the goals of the European Green Deal. ESG issues are not just a matter of compliance, which in a number of cases will have to be properly reported. They also mean that doing business in accordance with ESG standards will have implications for the performance of enterprises and, for example, a negative assessment in terms of ESG may result in a decision to withdraw from the purchase of a given property or acquisition of an enterprise.