ESG: An operational shift for real estate companies

In an era where sustainability is not merely a buzzword but a strategic imperative, real estate companies find themselves at the forefront of operational change. Integrating Environmental, Social, and Governance (ESG) factors has transitioned from a trend to a pivotal aspect of success for companies seeking long-term resilience and value creation. In this blog, Deepki looks at real estate companies’ operational changes to go towards sustainability and net zero.

Meeting 2050 objectives

Today, ESG practices are integral to corporate identity. It allows companies to align with specific values that significantly impact brand perception publicly. At the same time, companies are seeing their efforts to promote sustainable development and combat climate change move from voluntary to mandatory in a growing number of countries around the world. As an illustration, the European Commission’s Corporate Sustainability Reporting Directive (CSRD) now requires large companies to disclose information regarding their management and approach to social and environmental challenges. In the USA, the Securities and Exchange Commission (SEC) intends to set clear disclosure guidelines for public companies. 

Net zero emissions have recently become the benchmark for guiding ESG dynamics. Achieving zero net greenhouse gas (GHG) emissions by 2050 is vital to limiting global warming to a temperature of 1.5º C, which is the main objective of the Paris Agreement. This point is widely accepted by the scientific community, political decision-makers, businesses, institutional investors, and the community at large.

The growth of ESG

ESG in real estate has progressed steadily over the past two decades. In 2000, most “sustainable development” efforts were limited to one-off initiatives mentioned in the appendices of annual reports. Back then, we were proud of beehives on a roof, an organic menu in the cafeteria, or solar blinds. Well-intentioned or green, these initiatives were anecdotal in that they didn’t tackle the major problems and their scale. Fast forward to 2005, and a notable shift occurred with the introduction of building labels. Almost every major economy adopts its standard, including BREEAM in the UK, HQE in France, LEED in the USA, PASSIV’HAUSE and DGNB in Germany, Minergy in Switzerland, and more. This marked a pivotal moment, signifying a collective commitment to standardized sustainability metrics within the real estate sector.

Following this wave of voluntary initiatives, regulations have taken center stage. Governments and regulatory bodies worldwide have implemented frameworks to enforce ESG standards in real estate. These regulations aim to instill a systematic and comprehensive approach to sustainable practices. They are surpassing individual endeavors to address the more considerable environmental and social challenges inherent in the industry.

Read more: ‘Sustainable Real Estate: the road to net zero’ by Vincent Bryant, CEO of Deepki

Increasingly mature ESG topics 

Energy and carbon issues have become essential to real estate players’ ESG strategies. New regulations and voluntary schemes tend to broaden the range and complexity of environmental issues taken into account. While the market for biodiversity is currently less mature compared to carbon issues, a growing number of industry participants are dedicating themselves to this critical theme. Notably, the SFDR (Sustainable Finance Disclosure Regulation) includes an initial indicator covering the issue of biodiversity—specifically, the proportion of artificial surface area. This aspect is expected to be further developed in the reporting standards of the CSRD (Corporate Sustainability Reporting Directive).

Read more: EU Green Deal: CSRD incorporated during COP27

We will explore three aspects that have evolved alongside the progression of ESG practices: stakeholder engagement (1), technological innovation (2), and talent development (3). 

1. Stakeholder engagement

Gone are the days when ESG specialists worked alone. Nowadays, they usually work alongside investment teams, helping to guide their decisions. Previously, the primary focus was on data collection, but there has been a shift towards strategic planning. Now, the key questions are: what are the objectives, and what results are we aiming for? The orchestration of this transformation now involves a collective effort. This requires collaboration among various stakeholders, including facility managers, property managers, asset managers, and more.

While stakeholder involvement is a requirement for certain labels and regulations and engages fund managers in this way, collaboration is more generally a key element in the success of ESG strategies.  

How it works

Transitioning from the broader context of stakeholder involvement and collaboration in ESG strategies, the practical application comes to life through a notable international initiative undertaken by one of Deepki’s clients. Let’s have a look at a more tangible example, an asset management company working with Deepki since 2018. The client has implemented a comprehensive roadmap spanning 12 countries. Notably, in France, adherence to the Tertiary Decree stands as a pivotal focus.

At the heart of this project, the core team works diligently in quarterly collaboration with Deepki to fine-tune and update the comprehensive roadmap. Across each region, Sustainability Project Managers—whether asset managers or dedicated professionals tailored to each country’s needs—emerge as crucial points of contact for both training initiatives and meticulous data collection. Larger countries convene bi-weekly meetings, fostering collaboration, while smaller nations, such as Spain, opt for meetings when needed.

Instituting a governance framework, quarterly meeting updates between Deepki and local representatives are established, functioning as pivotal regional touchpoints. A noteworthy challenge lies in the coordination efforts of these local representatives with on-the-ground Property Managers tasked with data collection. 

Besides, stakeholders in daily contact with assets and their occupants have the best knowledge and management levers. For example, France’s SRI label requires property managers, facility managers, and works contractors to include an ESG clause in their contracts. Constant communication is then the key to extending the approach throughout the cycle. 

Tenant: a vital element in the success of ESG strategies

Tenants are another key stakeholder in the success of an ESG strategy. This is particularly true when it comes to reducing the environmental impact of buildings (energy consumption, GHG emissions, water consumption, etc.). Usage is an important lever, as demonstrated by the sobriety plans of various European companies. Their involvement, among other things, has led to energy savings estimated at over 10% across all sectors in France. This sobriety can be applied to all consumption areas as long as it’s a collaborative effort. 

Collaborating with tenants might include educating them on industry best practices for how they make more sustainable decisions to minimize recyclable waste and cut energy and water consumption. 

By engaging tenants in sustainability initiatives and promoting sustainable behaviors, building owners can create a sense of community and shared responsibility for environmental and social initiatives, thereby making it easier for people to make appropriate choices. Additionally, as daily users of the building, tenants can play a crucial role in identifying and implementing effective sustainability initiatives and identifying areas for improvement.

Learn more with Deepki’s energy management guide: best practices to succeed in reducing your consumption

2. Technological innovation 

Data quality remains the main obstacle to ESG investment. For example, incomplete and inconsistent data and research are most likely to be cited as one of the most significant barriers to investor adoption of ESG investing. The biggest ESG data challenges are also linked to the poor quality of ESG data analysis. When it comes to reporting on ESG issues, by far, the most common approach among investors is to integrate data into existing financial reports. 

Other approaches, such as providing raw ESG data, dynamic data visualization, or static reporting, are less widespread. New regulations, such as the EU’s SFDR and the adoption of net-zero carbon emission targets, are increasing the importance of ESG investment and sustainability reporting.

Access to data, the main obstacle to integrating ESG criteria

Since the late 2010s, there has been an increasing demand for reliable, up-to-date data on ESG investments for various reasons. One of these is the focus of many institutional investors on tackling climate change. They aim to decarbonize portfolios and engage with investee companies, particularly those with high greenhouse gas emissions. The goal is to encourage these companies to make positive changes. In addition, new regulatory requirements, such as the European Union’s SFDR, call for greater transparency in sustainability-related information. The rise of impact investing, aiming for measurable positive contributions to ESG goals, further fuels the push for enhanced ESG data. As we approach 2024, the significance of ESG data for investors intensifies. Despite the growth in ESG investing since 2017, key challenges persist. This raises questions about the main issues investors face regarding ESG data and the strategies employed to overcome these challenges.

In pursuing reliable Key Performance Indicators (KPIs), Deepki underscores the importance of comprehensive and relevant information. Armed with a profound understanding of portfolios, asset managers can strategically set priorities and direct efforts toward areas showing weaker performance or higher risk.

Thanks to the Deepki Ready platform, we are able to understand our portfolio’s environmental performance, compare it with the market average, and identify areas for improvement, as well as exposure to physical climate risk. Deepki’s team supports us in monitoring our assets on an ongoing basis and taking measures to improve our ESG performance.

Claudio Nardone, CEO at Sagitta SGR

3. Talent development

It takes a village! The entire sector is evolving to meet the EU’s objectives. The industry must come together to educate a generation of “net zero” professionals, including engineering firms, project managers, contractors, construction and maintenance companies, auditors, consultants, and more. Achieving large-scale and rapid renovations necessitates established processes, dependable measurement methods, and robust standards to assess financial impact, among other factors.

Internalizing the ESG reflex, particularly the net zero reflex, presents a significant challenge for asset managers. This requires comprehensively integrating ESG and climate change considerations into every facet of their responsibilities. From ESG due diligence during asset acquisition to monitoring asset performance, attracting new tenants, and navigating regulatory compliance, asset managers play a central role in driving sustainable investment strategies.

A crucial aspect of successful portfolio policies is aligning stakeholder interests. Whether in-house or external, property managers are the linchpin of a robust net zero investment strategy, their role extends beyond traditional property management responsibilities. They include building insights (type of heating energy, metering plans, technical history, etc.), tenant relations (rental management, data access consent, etc.), and navigating the evolving landscape of decarbonization and climate change resilience.

Shaping skilled professionals for sustainability

More than ever, companies are aligning their strategies with ESG goals. They are demanding a workforce equipped to integrate sustainability and social responsibility seamlessly. Key ESG roles, including ESG Analyst, ESG Consultant, Sustainability Specialist, ESG Engineer, and Social Impact Analyst, are becoming increasingly vital in steering organizations towards a sustainable and responsible future. This is illustrated by the example of La Française, which has appointed Eric Bouvier as its Chief Data Officer.

Amid this landscape, Deepki stands out with its distinctive offering – a combination of an ESG collaborative SaaS platform and a tailored advisory service. With a dedicated team of 50+ ESG and Carbon specialists foreseeing ESG trends before they impact businesses, Deepki becomes an instrumental partner in facilitating the transformation journey that companies strive for. Deepki’s commitment to staying abreast of evolving landscapes ensures that its clients are not just prepared for today’s challenges but are well-equipped for the challenges that lie ahead.

Learn more about Deepki’s solutions.

ESG for the long-term

Since 2017, institutional investors have moved from the “why” of integrating ESG to the “how” of implementing it. They are now increasingly confronting the challenges of using ESG data, achieving their “net zero” objectives, and integrating ESG expertise into their operations. 

There’s a wide range of initiatives and projects available to help real estate players with their carbon mitigation strategies: building certification, fund labels, national and international benchmarks, climate and energy trajectories, isolated initiatives, etc. Grand ambitions are good… But a pragmatic approach is better! If there’s one thing Deepki learned after nearly ten years supporting ESG deployment strategies in real estate, it’s the importance of setting priorities and moving forward slowly but surely.

With the growing importance of ESG, companies need to change how they operate and know how to do it. This is where Deepki steps into the spotlight. In November 2022, Deepki launched its “ESG Index” in partnership with the IEIF to help real estate players understand the performance of their assets to the market and meet the challenges of the EU Taxonomy. This represents the first European benchmark measuring real estate’s ESG performance. Freely accessible online, it provides values for the average, top 15%, and top 30% of building stock in terms of performance in primary energy consumption for each asset class by country. The “ESG Index” facilitates easy comparison for clients and companies, allowing them to gauge their performance against their peers.