Mastering ESG: Essential insights for real estate professionals

The concept of Environmental, Social and Governance (ESG) has gained significant traction across industries in recent years as a key effort to combat climate change and ensure a greener future for all. The asset class of real estate is no exception: a study by the European Commission estimates that residential and commercial real estate is responsible for approximately 40% of Europe’s energy consumption and 36% of Europe’s greenhouse gas emissions. So, it seems only logical for the EU and its member states to have revised and introduced new ESG-related guidelines and directives for the real estate industry.

ESG in real estate encompasses environmentally friendly practices, social responsibility and transparent governance. As ESG issues continue to rise in importance, it becomes crucial for all real estate professionals, banking risk departments, and insurance companies to understand its implications. Investors like institutional investors, real estate investors, investment managers or fund managers are no exception. This article explores the key points you need to know about ESG in real estate, focusing on its rising significance in Europe, the critical role of energy performance, and the importance of accessing reliable energy-related data.

What does ESG mean for the real estate industry?

The concept of ESG took shape in the mid-2000s as sustainability and corporate social responsibility rose to prominence. It was first linked to the real estate sector as the European Union introduced the Energy Performance of Buildings Directive (EPBD), which aimed to improve the energy efficiency of buildings and reduce their carbon footprint. This directive laid the foundation for ESG considerations in the real estate sector, mainly regarding energy performance. In parallel, the 2008 financial crisis prompted a reevaluation of business practices, leading to an increased focus on risk management, transparency, and long-term sustainability.

Nowadays, ESG performance in the real estate industry refers to integrating sustainable practices that prioritise environmentally friendly practices and initiatives which have a positive social impact and good governance. It involves developing, managing and renovating properties to reduce energy use, minimise carbon emissions, and enhance social well-being, thus ensuring sustainable finance and business practices. By embracing ESG principles, all stakeholders in the real estate industry move towards creating sustainable, resilient green buildings that contribute to a more sustainable future.

ESG matters are at the top of the agenda for the real estate sector

Europe has emerged as a frontrunner in setting sustainable development goals in the real estate industry. The “E” (which stands for “Environmental”) of “ESG” has been the clear priority, and the European Union's initiatives, such as the EU Green Deal and various national regulations, have spurred the adoption of greener practices across the continent.

Although the EU has taken significant steps to ensure a greener future for the real estate sector, there is still a long way to go. For example, to reach the overall EU objective of a 55% reduction in emissions by 2030, the building sector would need to reduce its emissions by 60%.

Energy performance is a critical component of ESG

A key success factor in Europe’s initiative to transform its real estate industry is its ability to incentivise sustainable buildings. Energy-efficient buildings not only help reduce environmental impact but also offer economic benefits, e.g. through lower operating costs and improved occupant comfort. Energy performance indicators and metrics, such as energy consumption per square meter or energy efficiency ratings, would enable you to assess a property's level of sustainability and environmental performance.

In that area, creating the Energy Performance Certificate (EPC) in 2002 played a significant role. First introduced by the European Union’s Energy Performance of Buildings Directive (EPBD, Directive 2002/91/ EC1), it is defined as “a certificate [...], which indicates the energy performance of a building or building unit”. Its introduction and various revisions throughout the years reflect Europe’s increasingly strict environmental policy regarding real estate. EU member states have also implemented their own labelling systems, but there is no standardised EU-wide system.

Getting a better understanding of the impact of ESG on property value: a key challenge for professionals

The most measurable and notable impact of Europe’s ambitious renewable energy and climate policy on the real estate industry is the influence of energy performance on property prices. A clear trend is emerging: assets that are more energy efficient and therefore have better energy performance certificates are expected to have higher value and will continue to increase in value in the near future compared to assets which are not efficient energy-wise (these are expected to decrease in value slowly).

Two critical factors are driving this impact on property prices. First, the rising cost of energy –– this has an impact on energy expenditure, and in particular, heating. Second, changes in regulations –– this impacts real estate investments as purchasing properties with “bad” energy labels will require more foresight and an intelligent renovation strategy (e.g. the introduction of energy efficiency requirements for renting and selling).

With that in mind, real estate, insurance and financial services professionals face a clear challenge: they need to understand and analyse the energy consumption and efficiency of their real estate assets and those of their customers.

For that purpose, access to accurate, reliable and comprehensive energy-performance data is crucial. However, the availability of such ESG data varies from country to country, so data-driven decision-making can be complex.

At PriceHubble, ESG issues are at the heart of our strategy. Our expertise and our unique position within Europe enable us to provide you with the most accurate valuations and analyses on the market. Our goal is to enable our customers to understand the impact that energy performance has on residential property value; therefore, integrating ESG data into our valuation models and making our valuations sensitive to changing energy scores was key. This functionality is available in selected countries, don’t hesitate to contact us to learn more about it.

ESG and shifting towards sustainability: the future of European real estate

ESG factors have become a key consideration in the real estate industry, driving sustainability and risk mitigation. Europe, in particular, has witnessed a significant shift towards ESG integration, with policies and regulations supporting sustainable development. Energy performance plays a crucial role in achieving environmental, social and governance goals, and accessing reliable energy-related data ultimately benefits all stakeholders — real estate professionals, banking risk departments, financial services providers, insurance companies, homeowners and occupiers.

If you would like to access accurate energy performance data – for creating reliable property valuation reports, for example – assess its impact on the value of your real estate assets, or simply would like more information about our solutions, please don’t hesitate to contact us.