trends legal magazine
Real Estate No 8
The Netherlands – Wieringa Advocaten
Sustainable investing, also in real estate, will become the norm | TRENDS Real Estate No 8
In the previous edition, J. Sinnige and M. Beekman informed you about the new energy requirements for office buildings in the Netherlands that will apply from 1 January 2023. These requirements show that it is necessary that sustainability is increased in the focus of the real estate sector. The trend towards more sustainable real estate and real estate investments is also visible on the regulatory level of the European Union. These trends and regulatory initiatives mark that sustainable investing will become the norm.
There is a trend in the real estate sector and finance industry towards reporting and improvements of sustainability factors. As the real estate sector is responsible for 20% of global greenhouse gas emissions and for more than 40% of the global energy consumption, improvements in this sector are vital for reaching sustainability targets – such as the ones set out in the Paris Agreement.
Setting the baseline for improvements is mostly done via the use of ESG data. ESG stands for environmental, social, and governance aspects of investments. Reporting on these issues has developed due to market pressure for companies to become more sustainable. Since the 1960’s, companies have been more involved in sustainability and ethical investments. This has led to the development of many policies by companies on how to measure sustainability risks and the contribution of their investments towards future sustainability goals. By focusing on the environmental (such as pollution and climate risks), social (such as worker safety and diversity), and governance standards (such as succession planning and accounting standards), investors are not only basing their decisions on subjective morals or on environmental conscious based business practices but on combining different aspects in a data-driven approach. Such data for the environmental aspect can consist of data on carbon emissions and the use of renewable energy sources. The use of ESG data by investors allows them to rank businesses on considerations of risks. This has proven to be successful, ESG factor-based investing often supports sustainable companies or projects with the same level of financial returns as a standard investment approach, while reducing risks such as regulatory risks and the associated costs. Hence the move to the use of ESG data as a baseline for sustainable investments.
In the Netherlands, there is a strong rise in the use of ESG-driven investment approaches. The logic behind this focus is that investors are becoming increasingly more aware of ESG risks and want to create portfolios that are deemed to be more sustainable while still making good financial returns. ESG due diligence is also developing into a standard procedure for investors when choosing companies to invest in. The influence of ESG aspects of investments is therefore overall becoming increasingly more important. The market keeps adding pressure on investors to look at ESG factors and take these aspects into account while investing. Real estate companies, therefore, need to have a solid ESG policy for documenting their approach towards ESG risk factors to attract investments and funding in the future.
Investors are also starting to demand general sustainability standards across the industry. Companies all create their own terminology and standards for ranking, which makes it hard to compare companies properly. Therefore, there is a need for standardised reporting which makes the ranking of companies based on sustainability possible. Via the Sustainable Finance Disclosure Regulation (SFDR), which is part of the Sustainable Finance Action Plan developed by the European Union, a start into standardised reporting has been made. Since 10 March 2021, financial market participants and financial advisors must publicly report on the sustainability of their investments. Companies such as banks and pension funds must disclose how they deal with events and circumstances regarding sustainability that have an actual or potential negative impact on the ultimate value of their investments. These are for example the disclosure of greenhouse gas emissions or the use of non-renewable energy in their portfolio companies.
As a result of the increased use of standardised terminology and reporting, the European Union hopes to stimulate more sustainable investments and create transparency and comparability in the market. Consequently, it can be said the European Union reinforces the market shift towards the use of data-driven ESG risk management. These regulatory initiatives will stimulate sustainable investments even more.
The use of ESG data in the real estate sector offers unique insights into a portfolio and creates an opportunity to attract new investors with a higher priority for sustainability. By proactively approaching sustainability and utilising ESG data, companies will gain an advantage over those that do not yet approach investments this way, because sustainability will only continue to grow more important. Staying on top of new regulations will become an advantage in less developed international markets and will also prepare companies for regulations that will be introduced in other countries. After all, only changing lights to LED lights will not be sufficient anymore, real estate investors will also need to contextualise and communicate their efforts.
Esmee C. Wolters
Article from – TRENDS Real Estate No 8
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