Challenges and opportunities of ESG criteria for the real estate industry

Few topics are currently more hotly debated in the real estate sector than ESG criteria and their implications. Real estate companies are called upon to act and comply with the legal requirements. However, the speed with which the new regulations were introduced has led to an information gap in many companies. Employees feel insufficiently informed and correspondingly insecure in dealing with the requirements. Last but not least, the issue of ESG is to be viewed differently depending on the sector of the economy and should therefore be assessed individually.

KUGU took a closer look at the topic for the real estate industry and compiled answers to the most important questions. It turns out that ESG also represents an opportunity to reshape the market. The required digitalization of real estate management automates and simplifies work processes, creates transparency and, with the right measures, can lead to greater energy efficiency in buildings. Those who view ESG as an opportunity for change rather than a necessary evil now have the opportunity to conquer tomorrow's market with new business models.

What does ESG stand for and what requirements do the three areas place on the real estate industry?

The EU Action Plan on Sustainable Finance stipulates that companies must disclose their sustainability performance in the areas of environment, social and governance. Annual reporting based on defined criteria is intended to ensure greater transparency and provide important indications of a company's creditworthiness. Currently, financial market participants with more than 500 employees are obliged to report. It is planned to extend mandatory reporting to smaller market participants from 2026.

The Environment unit focuses on climate-friendly construction methods and building management. For the purpose of climate and environmental protection, buildings should be energy-efficient and future-proof. In concrete terms, this is achieved through decarbonization, higher proportions of green space, green leases, heat-efficient systems and the use of renewable energies.

In the Social area, working conditions, social commitment and health protection play a key role. Both internal aspects of the company, such as work-life balance, diversity and inclusion in the team, and external aspects with regard to society are examined. Real estate companies bear a particularly high responsibility for society. Through social housing, retirement homes, student housing and barrier-free buildings, they can ensure equality and promote community development.

The area of Governance is aimed at the sustainable management of the company. All control and management processes as well as corporate values are to be designed sustainably. The introduction of sustainability and value management is important in this context and helps to meet the requirements.

How are the Green Deal and the EU taxonomy related to the ESG criteria?

The so-called Green Deal includes the climate targets for the EU set by the EU Commission. These include the reduction of greenhouse gases by 60% (from 1990 to 2030) and the complete elimination of net greenhouse gas emissions by 2050. Europe is to become the first climate-neutral continent. The fact that the real estate sector has a responsible role to play in this is evidenced by the 36% of greenhouse gases currently attributable to the building sector alone. Within the Green Deal, the EU taxonomy is an instrument for achieving these climate targets.

The EU Taxonomy divides economic activities and products into different levels of sustainability to give direction to businesses and society as to what can be considered "sustainable." The main goal is to establish a Europe-wide, uniform classification system for sustainable economic activities. For the building stock, for example, the taxonomy states that buildings constructed before Dec. 31, 2020, are only sustainable if they meet the energy efficiency requirements as defined by Energy Performance Certificate A or are among the 15% most energy efficient buildings in the national or regional building stock.

What challenges do real estate companies face in meeting ESG requirements?

From January 2023, the form of ESG reporting will be concretized. Companies will be required to disclose the content, methodology and presentation of ESG criteria in accordance with very precise regulations. The biggest challenge here will then be data collection, which will present companies with technological, financial and crafting difficulties. Many companies simply do not yet have systems in place for scalable data management, or their existing IT systems are not interoperable with metering technology. As a result, energy data relevant to ESG reporting can only be laboriously extracted from utility bills and manually transferred to external tools or Excel spreadsheets. Furthermore, there is a lack of IT service providers and technical expertise, automated processes for error messages and reporting, and easily accessible software tools that enable collaborative work.

It turns out that successful ESG management only works with digitization. Beyond the automation and optimization of existing processes, ESG regulations call for the digitization of entirely new workflows. Since something like this does not happen overnight, agile working methods and good project management are important to ensure that existing and new processes are networked across systems.

Outlook - How is the real estate industry changing as a result of ESG criteria?

In terms of sustainability management and digitalization, the real estate sector still has a lot of catching up to do compared to the rest of the industry. Consequently, the industry must and will change significantly in the coming years. The topic of holism is making its way into the industry. Real estate will no longer be planned and developed monolithically, but in close cooperation with authorities and urban and environmental planners. In the future, ESG-compliant construction projects in particular will generate high returns and remain competitive.

So how exactly do I as a real estate company need to take action now?

The key word is an energy-efficient and future-proof building stock. Where this has not yet happened, the first step is to install the hardware that is indispensable for digital processes. Once the basic requirements have been met, tools are then needed to collect and manage the data.

The digital energy data platform from KUGU Home is a tool that uses IoT technology and artificial intelligence to make energy data transparent and evaluate it in real time: from heating cost billing and system control to CO2 monitoring and technical system management. KUGU supports real estate companies in saving energy, significantly improving the CO2 balance and making buildings ESG-compliant as well as future-proof.

With regard to sustainability and ESG criteria, the KUGU software permanently monitors the CO2 load of the building by means of live data from gas, district heating and oil consumption and directly identifies CO2 optimization potential of the facilities. It thus provides the perfect data basis forESG reporting while complying with compliance regulations.

Do you have questions about ESG? Our KUGU expert will be happy to help you:

Christopher von Gumppenberg

Founder & CEO of KUGU Home GmbH