May 2024

Is Being “Green” Sustainable?

With an increasing number of factors, typically under the ESG umbrella, forcing sustainability requirements on businesses, implementation seems inevitable. The urgent question remains of whether initial implementation scheduling can be met. As 2024 is the first fiscal year for which companies are obliged to report under the European Union’s environmental, social, and governance (ESG) regulations, sustainability matters are a hot topic.

Part of the Landscape

Reporting obligations are not the only thing driving interest in ESG. Sustainability mechanisms are already widely applied by financing institutions and investors. Concepts such as “green premium” and “brown discount” are well-known, and institutions like the European Central Bank (ECB) are especially attuned to the impact of climate-related factors in credit risk management at all stages of the investment process.

Banks within the EU are, on the whole, implementing ESG requirements in the form of clauses in financing agreements. In the real estate sector, these clauses impose the need for a certain number of zero emission buildings within an investor’s portfolio (or leased areas) within a certain period of time. Alternatively, these clauses impose the need to increase the energy efficiency of a building by a certain percentage each year, or the need to demonstrate that the energy is derived to some extent from renewable resources. The bar has been set.

Standards are High

There are multiple drivers pushing these requirements forward, including pressure from financial institutions and by the EU through regulations such as the Directive on Energy Performance of Buildings (EPBD), which should be adopted in the second quarter of 2024.

The EPBD bar has been set so high that it will be incredibly difficult for many countries to comply. Work must begin now in order for older buildings, for example, to be made “green”, or at least “greener”. One positive effect of this pressure is that the EU real estate market will be reinvigorated by a wave of renovation work on older buildings, making them more energy efficient, solar-ready, lowering their energy consumption, reducing their dependence on energy from fossil fuels, and equipping parking places with electric charging stations.

Now or Never

Although the EU will not likely postpone the deadlines for the implementation of these requirements, we cannot ignore the significance of the costs involved. Sustainability drivers such as those initiated by the European Central Bank (ECB) and other financial institutions already have been set in motion and are having an impact on business, even if EU regulations have not yet been fully applied.

The slow path to sustainability, which has been building for years, is not only clear but inevitable. The only question now for real estate investors is when and how to begin implementing it in order to make it as cost-effective as possible.

Author: Sebastian Janicki

Originally published Spring 2024 in GGI FYI