The significance of ESG

01-06-2024

The significance of ESG

According to recent studies, environmental, social, and governance (ESG) is a key value driver of real estate investments. Both investors and lenders are increasing their focus on ESG, not only because it may be part of their core values or to meet governmental obligations, but also because the sustainability performance can have a financial impact, both downward and upward.

As to upward potential, real estate with an excellent sustainability rating is likely to be an attractive proposition for buyers and lenders. Reduced energy consumption may well be an important factor in attracting tenants in a high energy-cost environment. Moreover, investors are expected to be eager to add prime sustainable real estate to their portfolio, as this may allow them to tap into real estate funds earmarked for “green” investments.

Also in real estate financing ESG plays an important role. In recent years as a result of the increasing relevance and popularity of forms of sustainable financing, several sustainable financing instruments have been developed for both loans and bonds. For loans in the international financing market, the 'Green Loans' and 'Sustainability-Linked Loans' become more popular and may even provide more attractive financing options.

A key concept in this context is the EU Taxonomy Regulation. The Taxonomy introduces a classification system for environmentally sustainable activities and investments. The Taxonomy requires funds to classify investment products that they promote as sustainable under the classification system that follows from the Taxonomy.

New European regulations and directives in the field of sustainability will have significant impact on real estate enterprises in the short term. Real estate enterprises will have to work their way through the reporting requirements, sustainability qualifications and material requirements for their buildings. But even for enterprises for who real estate is not their core business, the sustainability requirements and reporting obligations to which (the use of) real estate is subject, will be of importance in relation to the real estate that is owned or used by these enterprises for the operation of their business. ESG will present challenges, in particular as regulations in this area are still evolving. We will continue to monitor these developments closely. Since the most important ESG regulations and directives originate from the European Union, we as CMS follow developments not only in Amsterdam but with our colleagues throughout Europe. In an European context, we develop tools for our clients so that they can stay up-to-date.

For a more detailed outline of ESG aspects we refer to our specific ESG white paper: Future Proof Real Estate.