German lawmakers have a history of addressing some of the key issues around ESG, and this has helped to raise awareness of the topic in the country. “Even before the term ‘ESG’ became popular, environmental themes were part of our daily lives”, explains Isabella Chacón-Troidl, Chief Investment Officer at BNP Paribas Real Estate Investment Management Germany GmbH.
The German market has been shaped by regulations addressing energy efficiency in buildings (the German Energy Saving Ordinance) especially in the residential sector, environmental pollution (Federal Immission Control Act) and social issues such as employee protection (Occupational Health and Safety Act). Furthermore, the country’s first energy efficiency requirements for buildings date back to 1977.
“Now, the Covid-19 pandemic and the EU taxonomy have given the sector a dynamic boost”, she explains, “and investors are openly asking questions about the energy and health performance of our assets.”
According to a recent survey by Fonds Forum, 52% of real estate investors in Germany give ESG issues comprehensive consideration when developing a product. Investors are increasingly seeking products that correspond to the Sustainable Development Goals. This set of 17 objectives established by the United Nations aims to create a better future for everyone, and has many points in common with an ESG approach.
The surge in interest is not just confined to investors. “Tenants are also becoming more interested in ESG”, explains Isabella Chacón-Troidl, “asking if the buildings use sustainable and local materials, if suppliers are in line with their own social standards, etc.” This trend is driven by a recognition that adopting a strong ESG strategy can help companies to attract the best new recruits and retain their talent. “Generation Y employees want to work for companies that care about the environment and society, and Covid-19 is likely to strengthen this trend”, she says.
In response to this demand, and following the Scandinavian and Austrian models, we see in Germany more interest and an increase in concrete-wood combinations, particularly in the residential sector. Concrete-heavy constructions are energy-heavy to build and demolish, whereas wood structures are more sustainable and engender fewer emissions in their development. This trend to use wood as a building resource looks set to grow in the future.
Boosted by EU regulations
New EU regulations governing ESG obligations are generally seen as an opportunity in Germany. The real estate market has long been controlled by local laws, and EU Taxonomy will require all financial players in Europe to ensure their products me the same standards.
“EU taxonomy will help the whole real estate industry to benchmark products”, explains Isabella Chacón-Troidl, “and it will give investors more transparency so they can compare assets in terms of sustainability”. In this way, the new regulation is expected to drive demand for ESG investment in real estate.
However, it will also raise a particular challenge for the German market concerning the collection of consistent data for the assets.
Generation Y employees want to work for companies that care about the environment and society, and Covid-19 is likely to strengthen this trend
Towards data transparency
With EU Taxonomy, investment managers are required to disclose key information about their ESG products so they can be assessed for environmental sustainability. To fulfil this obligation, real estate investment managers must deliver reliable data about the environmental, energy and social performances of buildings in their portfolio. In Germany, collecting such data can be challenging.
There is no legal obligation for tenants to disclose their energy consumption data. To improve the energy efficiency and to gain CO2 reduction, leases have to be changed into “green- leases” including, data exchange clauses, agreements on energy monitoring and management, general agreements on ESG compliance and governance . By educating tenants, the aim is to encourage them to adopt more sustainable consumption habits and share their data.
Furthermore two years ago, BNP Paribas Real Estate Investment Management (REIM) Germany GmbH became one of the first market players to offer green energy contracts to their tenants. BNP Paribas REIM Germany GmbH will continue to improve digitalisation of data collection and smart building technologies.
Investing in energy requalification
This drive towards digitalisation is one example of a central strategy of BNP Paribas REIM Germany GmbH. The company is actively focusing on reducing carbon emissions in its real estate portfolio by investing in technologies to improve older buildings, rather than exclusively investing in new, green buildings. This is notably the focus of its new EIPF product.
Launched at the end of 2020, the European Impact Property Fund (EIPF) targets a 40% reduction of Greenhouse Gas Emissions across its portfolio within 10 years. This makes it the first property fund to actively seek compliance with the 2015 Paris Agreement. “There are so many assets in our cities which benefit from good location and transport connections, but they are inefficient in terms of energy”, says Isabella Chacón-Troidl. “By upgrading their environmental performance, we can transform these buildings into highly valuable assets and reduce CO2 emissions.”
Beyond energy savings
Like in many countries, energy efficiency and environmental issues tend to dominate the German conversation around ESG. Nevertheless, there are two other components to ESG – social and governance – that need to be addressed.
“As BNP Paribas REIM operates in the banking sector, governance and CSR have always been a priority”, explains Isabella Chacón-Troidl. “In terms of the social aspects, there is a trend towards improving the well-being of people inside the building and providing real impact with an investment for the society ”
Focusing on the well-being of tenants means taking a holistic view of the building and its environment, and asking questions like: is there a good mix of offices, residential and commercial? Are there services like childcare and gyms? Is the area well-connected?
In the residential sector, the social trend in Germany has increased demand for affordable assets. Big cities are becoming more expensive with high cost of living. German investors who target affordable housing with their investments, use it as a means of social impact. However, in the office sector, social concerns are still a relatively low priority.
One possible solution is to monitor office tenants to ensure the balance of activities is aligned with the social requirements of the funds. Certain areas in the building could be leased at a lower rent to artists or other social activities, for example. “We also need to quantify the social aspect of assets by collecting data”, says Isabella Chacón-Troidl, stressing the need to convince investors by highlighting the benefits of well-being and social impact investing.
Traditionally, German investors tend to be relatively risk-averse. In the past, this may have been an obstacle to ESG-driven investment, but the Covid-19 pandemic and new EU regulations are shifting the balance. EU Taxonomy means products are simpler to benchmark, making it easier for investors to make low-risk decisions.
Furthermore, there is an increasing awareness among investors that ESG investments cannot only make their portfolio more resilient; it can also reduce risk. “Ultimately, investors will lose value if they don’t follow the ESG trend”, says Isabella Chacón-Troidl. “ESG is an investment in the future, in the long-term attractiveness of assets – and we believe it will end up delivering higher returns in the years to come.”