ESG in real estate must be considered in long-term perspective
By Paweł Kotlarski, director responsible for supporting corporate clients in implementing ESG strategies, CBRE
According to the UNFCCC 2021 report, in 2020, buildings worldwide occupied a gross area of 246 billion m2. This was a 9.8% increase on 2015. Yet over the same time, carbon dioxide emissions from buildings dropped by 17.2%, and energy consumption by 5.7%. Therefore, the growing area of properties is not accompanied by a greater adverse environmental impact. This is the result of a greater ESG awareness. Nowadays, corporate activities in this area are focused on streamlining consumption of utilities, but comprehensive, long-term strategies are of key importance.
Discussion about ESG in the real estate sector should start from narrowing down this very broad category. It comprises a vast number of elements concerning, for instance, circular economy, addressing social inequalities, protection of the environment or natural resources. In real estate, the scope of activities is somewhat limited but is vital for the efforts aimed at achieving climate neutrality. This is because buildings have a measureable effect on the environment and their occupants.
According to Eurostat data, the construction industry uses, indirectly or directly (mainly during occupation of the buildings), around 40% of energy produced by humanity. It generates more than 0.8 billion tonnes of waste – that’s 36% of all waste – each year. This is why it is so important to understand ESG in real estate, which I define as a set of procedures, measures, and rules which are the basis for proper and long-term functioning of the building in a way that reduces its adverse impact on the environment and the building’s occupants.
Several years of delivering goals for our commercial real estate clients have shown that ESG awareness has grown considerably. This is confirmed by CBRE’s European Investor Intentions Survey 2023 which shows that 81% of the investors will be taking ESG criteria into consideration in their decisions, in spite of the economic downturn and difficult geopolitical situation.
From short-term benefits to multi-annual strategies
The currently prevailing trend in ESG in real estate is to streamline the building’s functioning, specifically in environmental terms. This includes reduced consumption of utilities, for instance by installing faucet aerators, automatic equipment shut-down systems and adequate equipment operation schedules programmed in the BMS (building management system). Larger investments involving replacement of lighting fixtures or new building systems are also being made.
Goals related to real estate should be long-term. For most of the efforts, 2050 is the reference year, since by that time buildings in Europe will be required to have achieved climate neutrality. From this perspective, current operational measures to reduce consumption of utilities are important but have their limitations. At some moment of time, we will reach a point where further streamlining will no longer be possible. That critical moment will concern the comfort of the property’s occupants. After all, ESG is not only environmental (E) but also social (S). Therefore, streamlining will end where any further efforts might adversely affect the comfort of use of the space by its occupants.
The advantage of long-term strategies also consists in having the building’s entire life-cycle covered. More than 90% of the existing building stock will still be in use in 2050, by when climate neutrality is to be achieved. Real estate’s longevity results from the fact that the initial costs – financial and environmental – are high, and, thus, the goal is to incur such costs as rarely as possible. In addition to this, cities have been so intensely developed to date that there is no space for new buildings in the best and most attractive locations.
Since real estate is a long-term product, a long-term streamlining strategy is the best solution. Especially if such a strategy is based on investment and streamlining assumptions that take into account structural changes in the region or even in the entire country. Without these assumptions, the property will not achieve climate neutrality over a longer term. And clients who have long-term strategies in place, spreading the streamlining efforts over several years, are seen as more reliable, resilient, and less opportunistic.
Systemic tools and efforts
To go beyond short-term streamlining and operating efforts in terms of ESG, systemic solutions are necessary. These are still under development but we can offer a few examples of well-functioning products. One of the examples is Carbon Risk Real Estate Monitor (CRREM), which defines decarbonisation paths for the commercial and residential real-estate sectors, to manage the transformation risk and adapt to the Paris Agreement’s goals. To put it simply, this tool shows in a simplified manner the energy efficiency of the property, taking into account its location (each European country has different parameters embedded in this tool).
There are also solutions showing the property’s results over time. They collect reliable and accurate data on the building such as failures occurring, electricity consumption levels. This offers key knowledge and offers a long-term outlook on the efforts to be taken, whether in the field of investments or streamlining.
GRESB, a rating organisation using their own set of indicators measuring the property’s compliance with ESG guidelines, is also worth mentioning. These indicators are subject to annual evaluation which provides systemised information needed by the investors who assess the value of their properties based on compliance with ESG requirements.
Key challenges for companies in Poland
Companies in Poland that wish to start implementing ESG strategies need to consciously think about the challenges faced by the world, perform a self-examination, start collecting data about their properties, and plan reasonable actions. In the outset, it is worth focusing on what can be done instantly, but ultimately a long-term strategy must be developed, with renewable energy sources guaranteeing the building’s self-sufficiency being a vital component of that strategy. Such efforts are already being undertaken in Poland. Warehouses are the best prepared for this because their structure allows installation of photovoltaic panels on the roofs. Most companies, however, need to seek other solutions. A solar farm is an example. Ghelamco chose to build these, and has completed construction of their first three solar farms. The power output will supply the Warsaw Unit high-rise building onRondo Daszyńskiego.