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Column: 'There is no easy way out if you want to meet ESG requirements'

Vastgoedmarkt published this column on Feb. 24, 2023 (in Dutch). Vastgoedmarkt is a digital platform that provides up-to-date information, developments and news about commercial real estate. Below is the original version of the article.


A well-known residential investor thought GRESB could be used as a registered index for mandatory sustainability reports. An example of how market participants - and by no means the least - can go wrong when applying European sustainability regulations, writes Alexandra Jurgens-Boot in the new ESG section in Vastgoedmarkt.

Statutory ESG rules far-reaching for real estate players

Developments in European sustainability regulations follow each other in rapid succession. In addition to the Taxonomy Regulation already in force, the SFDR and the CSRD applicable from 2024, detailed reporting regulations came into force on 1 January 2023, based on which the first reports must be published by 30 June 2023 with very detailed data for 2022.

Although mandatory ESG regulation is not meant to be a label, it already has that effect on the property market. The financial market participant must report at the entity level and its financial product. Depending on the structuring, a financial product can consist of one or more properties. It pays to develop, buy or sell and or have in investment a light green financial product. Value retention and value development are simply greater, more financeable and less risky for longer-term marketability.

The assets of green (Article 8 and 9) funds rose 7.3% in Q4 2022 to €4.6 billion at the end of December. Together, the funds account for 55.5% of the EU universe. This development contrasts sharply with the €3.3 billion outflow from Article 6 (grey) funds.[1]

In the real estate value chain, I am always asked: ‘how do I get from a grey to a light green product?’ The answer is simple: it can only be done along the path of EU regulation. There are no easy ways out.

One example: a housing investor we know used GRESB as the “benchmark” for its light-green fund and, in addition, CRREM to provide insight into greenhouse gas emission reductions.

Unfortunately, GRESB does not qualify as a legal benchmark within the meaning of the Benchmark Regulation. The registered benchmarks required for reporting in the SFDR are performance indices, which refer to the performance of the financial product, but not the performance of the building.

As a measurement tool, CRREM relies on a CO2 calculation instead of the prescribed GHG calculation of the internationally recognised GHG Protocol. With CRREM, it has about 40% of the required data. However, for the legally required GHG calculation, methane, nitrous oxide, fluorform, perfluorochemicals, nitrogen trifluoride and sulphur hexafluoride data are also required, which are, among others, on the refrigeration plant. Those data are not included in a CRREM pathway.

Trade associations and consultants are creating unnecessary confusion. For example, INREV recently (January 2023) published a report on the impact of mandatory SFDR regulations, specifically on real estate. Unfortunately, this report lacked nuance.

  • The statement that residential properties are exempt from the taxonomy is too blunt. The scope is determined by EC no 1893/2006, based on which the NACE (Nomenclature statistique des activités économiques) codes were created.[2] It concludes that for new construction and renovation, all types of properties are suitable for alignment with the taxonomy, regardless of whether residential or not.

  • Second, the report states that embodied carbon is ignored in the SFDR. This is incorrect. Embodied carbon is indeed included in the CO2e calculation for new construction. CO2e emissions are calculated based on the GHG protocol, the value of emissions by an MPG or LCA calculation. For all purchases, premises, including inventory, the CO2e equivalent must be included. This is part of scope 3, for which little data is available. The GHG calculation is mandatory if investing in other companies; this indicator is optional if the investor only invests in real estate.

So for our housing investor, concretely, housing can be aligned with the taxonomy, but it is not always a wise investment decision. It is a misconception that building new homes is more beneficial for the portfolio’s carbon footprint than purchasing or retrofitting existing ones. Nor does a new build proportionally consistently outperform an existing house on greenhouse gas emissions. After all, new construction causes a lot of emissions.

Our housing investor concludes that he wants to revise his 2024 strategy. It has now adjusted its documentation, data collection and processing. They are prepared for the future mandatory reasonable assurance from auditors (CSRD).

[1] ‘SFDR: golf van downgrades Artikel 9 fondsen end 2022’, Morningstar 30 January 2023. [2] Specifically for real estate, the following codes apply within the Taxonomy:

  • “acquisition and ownership of buildings” belongs to code NACE code L68, which includes apartment buildings and dwellings.

  • In “construction of new buildings”, NACE code F41.1 & F41.2 include the construction of residential and non-residential buildings.

  • For “renovation of existing buildings”, NACE codes F41 & F43 belong, which include construction of both residential and non-residential buildings (F41) & construction works (F43).


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