There is scepticism in the market regarding the correlation between sustainability and financial performance but it is beneficial to be sustainable if you consider the overall life-cycle of the building, explains Oana Stamatin, ESG Chief Officer | CEE & Romania at Colliers. She talked to Property Forum about the challenges and opportunities owners of real estate face in striving for ESG compliance.
What does ESG mean for you as a consultant and for the property sector in general?
Working with ESG gives me the feeling that my work matters and has its purpose. Approaching ESG from the real estate point of view allows me to have an actual impact on the environment and society.
For me as a consultant, this is not a new story since sustainability was my focus in the past ten years. Still, I see it as a challenge, due to the abstract nature of ESG, the expectations of our clients that are rapidly growing and the unclarities that are still present in the regulatory landscape. Thus, my purpose is to help our clients to establish and implement an ESG focus which is tangible and achievable.
ESG are the three pillars based on which sustainable investments are made. For the property sector, it’s the way of showing that business, sustainability and social responsibility can work together. And having in mind the target of reducing greenhouse gas emissions by 55% in just 8 years, it is starting to be mandatory for the building owners or developers to have an ESG “agenda”, a strategy to ensure resilient buildings.
Oana Stamatin
ESG Chief Officer | CEE & Romania
Colliers
Many large market players have set ambitious targets to reach net-zero status. Is the full decarbonisation of the entire commercial real estate sector a plausible long-term goal?
I think that decarbonizing the commercial real estate sector to reach net-zero by 2050 can have economic benefits and job creation and it is not something unplausible, since the technology required for this is already available. But this is an area where business meets sustainability, and we will need to see more than targets and pledges ultimately. Actual investment plans, refurbishing/ renovation activities to obtain a lower carbon footprint, tracking carbon emissions are all required to create a plausible strategy. With the financial sector acting as an accelerator and with the upcoming regulations having an impact in ESG landscape (EU Corporate Sustainability Reporting Directive, EU Taxonomy and Sustainable Finance Disclosure Regulation), we will have more transparency and the property sector will have an actual framework for doing the work.
How ready are real estate markets in CEE for the implementation of ESG principles in projects? Are there any countries that are leading the way in this field?
Looking at the green certifications (e.g: LEED, BREEAM, DGNB) as a predictor of markets preparedness for implementing ESG principles or at least part of them, the Polish real estate market is leading the way, with almost half of the certified buildings in CEE being in Poland. The following on the list are the markets in the Czech Republic, Romania, Hungary and Slovakia, but all together they only nearly reach the size of the Polish market. Also, analysing the percentage of the green certified office space in relation to the total modern office space in the capitals, Warsaw is the most prepared market (based on the latest report issued by PLGBC) with a 94% share, followed by Bucharest, Budapest and Prague with 40-50% share, according to Colliers data.
Conversely, the European Directives on energy efficiency and energy performance, in different stages of local harmonization in CEE countries, set up more ambitious targets for the new construction and renovation projects. The inclusion of renewable energy, reporting of carbon emissions, new classes of energy performance and nearly net-zero energy buildings (nZEB) are now aspects on the agenda of every developer that starts a project in CEE, in order to achieve the intermediary and final targets set up by EU.
And since the EU sees the financial sector as a stimulant in this change of the market, by increasing the regulatory pressure, the ESG criteria will be part of every decision of the financial institutions that look into the real estate market.
What are some of the challenges currently faced by landlords when implementing ESG strategies?
Landlords of older office buildings might suffer in the long run as more and more tenants are placing a higher emphasis on energy efficiency. Thus, we might see investments to bring the buildings at a higher level of energy efficiency, while other buildings may find a future via reconversions. Otherwise, improving the efficiency of existent buildings plays a major role in obtaining carbon neutrality by 2050 and the landlords that make early improvements are favoured.
If we are talking about landlords having a diverse portfolio of buildings (office, warehouses or commercial centres), they might face problems in collecting, aggregating the information and aligning the raw data collected from different types of assets, in order to calculate the ESG KPIs. Some other challenges connected to data collection appear when ESG reporting requires tenant involvement/information and other personal data.
With ESG, the focus is usually on the E, especially in real estate. What are landlords in CEE doing to tackle the S and G components as well?
The pandemic highlighted the need to address more the “S” in ESG, and employee wellbeing, health and safety is something that more and more landlords will likely be looking into in the future. I have already seen WELL, Fitwel or WELL Health-Safety certifications appearing on the CEE real estate map, especially in the office sector, proof that there is a niche of landlords that want to offer a minimum set of standards to their tenants.
Since WELL (WELLv2) is aligned with GRESB (2020 GRESB Real Estate Assessment – a recognized global ESG benchmark) in the proportion of 45%, the landlords that are pursuing WELL Certification have high chances to have practices in place that improve their performance across the GRESB indicators.
Regarding the governance aspects, I consider that the landlords can’t afford the risk of not addressing this issue, being vital for their ability to continue business as usual in the current context. The investors, the tenants or the financial institutions are asking about corporate discipline and governance rules and will select their partners accordingly.
What is the main role of ESG reporting right now? Is it just good PR or a real guidance for investors?
ESG reporting is showing that you take a step forward and go beyond pledges and promises. ESG transparency is already a practice for proactive landlords because this way they can demonstrate how sustainability is integrated into their business.
With various ESG reporting standards and frameworks, it might be hard for investors to analyse consistent and comparable information or high-quality data. However, it is not a questionable fact that ESG information helps them manage the risks.
How does ESG compliance contribute to the overall financial results of landlords? Does the increased rental level or sales price usually make up for the required investments?
I know that there is this scepticism regarding the correlation between sustainability and financial performance. But it is beneficial to be sustainable if you consider the overall life-cycle of the building. The long-term operational costs are lower for a sustainable building and this translates into higher rents and higher occupancy rates.
In contrast, the assets that are not including sustainability, occupant health and employees’ wellbeing in their agenda become less attractive for tenants, financial institutions or investors and could easily become stranded. So, slowly, being ESG compliant will not be an option, but essential to remain competitive in the market.
