No longer a novelty or a ‘nice to have’, the acceptance, understanding and incorporation of a coherent ESG strategy has come to be regarded as a global business essential – and now even more so given the EU’s looming deadline for ESG compliance. Often at the vanguard, the real estate industry has responded to this shift in mentality in a manner that has been more than just adoptive, but innovative as well.
However, questions remain. Impacting the bottom line, doubters have asked if the short-term costs relating to ESG compliance can ever tangibly translate into long-term profitability. Saliently, concerns likewise exist as to the very validity of ESG’s potential to truly shape the planet for the better. In other words, can or will our commitment to ESG actually yield results?
Certainly, across the industry the enthusiasm and sincerity with which ESG has been embraced is to be applauded and clearly demonstrates the seriousness with which the topic is being treated.
Setting Precedents
“For years, we have been implementing our sustainable development strategy ‘Go Earthwise with Panattoni’,” says Emilia Dębowska of Panattoni. “As the first developer to embrace certifications like BREEAM, we set a new direction for industry expectations. Now, investors, funds, and financial institutions widely require such certifications from developers, recognising the importance of sustainability.
“Furthermore,” adds Dębowska, “customers benefit from lower operating costs associated with certified facilities, highlighting the far-reaching positive impact of Panattoni’s trailblazing commitment to sustainability and environmental responsibility.”
The visible result of these actions is over 10 million sq/m of Panattoni’s certified space across Europe and another 6.5 million under assessment – currently at BREEAM Excellent level. By the end of 2022, the developer had achieved an Excellent level in 18 investments, and this year, another six facilities have already joined their ranks. The developer’s first Polish investment – Panattoni Park Szczecin III – also received a certificate at the highest possible level of Outstanding in February this year.
Previously, this level was achieved by one of the developer’s investments in the Czech Republic - Panattoni Park Cheb South. Currently, construction is underway for another three investments there, which are also expected to reach this level, as well as ten other projects – with a total area of 420,000 sq/m - which will be certified at the Excellent level. Panattoni’s portfolio has also expanded to include the first highly energy-efficient factory for Danfoss Poland, fully-powered by renewable energy sources, where all technical systems of the building are electrified, and waste heat from production processes is used for heating buildings and water.
Philosophies
The commitment to ESG has resounded across the sector. “MDC2 was set up with ESG as a core pillar of its business activities,” says Jeremy Cordery of MDC2. “It’s in our DNA and we are 100% committed to delivering sustainable buildings through a coordinated approach of E, S and G.”
Such pledges have now become enshrined in real estate dialogue. “Long-term and complementary ESG activities are of strategic importance for our business and are in line with Ghelamco’s philosophy,” says Jarosław Zagórski. “We are always looking for ways to make our projects even more ecological, innovative and comfortable, and that’s attributed to our sense of responsibility for our common good, which is the environment, but also responds to the future needs of business.”
At Revetas, Katerina Nesitova is equally frank when surmising the company’s activities and ESG policy. “ESG isn’t going to go away,” she says, “but I think generally-speaking the topic has come to be associated with positive outcomes – not just by companies, but by society as a whole. Yes, I am surprised by the speed with which ESG has come to influence every aspect of how firms operate, but I mean that in a good way. ESG is here to stay, and we’re more than up for the challenge.”
Playing The Long Game
In the case of Revetas, the ultimate goal has already been expressed in black-and-white terms, that being a portfolio that aspires to achieve net carbon neutrality by 2040.
“Everything we do and everything we implement or plan is in line with this ambitious goal,” says Nesitova. “As a company, we can enhance the long-term sustainability of our investments and deliver a better outcome not just for our investors, but for the community within which we operate.”
Applying such a far-sighted approach is fundamental when understanding the mechanics of ESG and unlocking its benefits. As per in-depth reports previously released by PwC, inaction and a “business as usual” attitude will likely lead to value destruction as new legislation comes into force. Moreover, with peers making progress on ESG matters and consumer, employee and investor expectations also changing, value erosion can be seen as an inevitable outcome.
On the other hand, those following “a sustainable transformation” stand to gain copious advantages in the long-run: customer demand for ESG-driven products and companies should translate into top-line growth whilst reductions in emissions will naturally lead to reductions in costs. Regulatory compliance, meanwhile, dovetails towards tax credits and subsidy eligibility (not to mention the avoidance of industry penalties). Moreover, investment in green assets should translate into asset optimisation whereas the creation of purpose-driven workplaces should, to all intents and purposes, spark an increase in productivity.
In many respects, CTP’s business model has shown how ESG commitments can be successfully harnessed. “For many years, ESG has been a vital dimension of CTP’s business,” says Adam Targowski. “Our strategy is founded on a long-term approach where we aim to build and manage properties that are of the highest quality and efficiency, meeting not just current demands, but also those of tomorrow.
“As owners, we prioritise energy efficiency and photovoltaics to minimise occupancy costs. Additionally, as a long-term owner and industrial park developer, we place great importance on being a good and engaged neighbour. In collaboration with local municipalities, we’ve undertaken several initiatives to support education and enhance infrastructure. We believe that such initiatives are essential for the overall progress and prosperity of the community.”
Adaptability
Crucially, it has become abundantly apparent that ESG is a fluid creature in a state of constant development – how firms adapt to changes, external pressures and force majeures is critical, and to some extent, the lockdown era can be seen as a watershed moment.
“Covid reshaped expectations as to our working environment,” says Panattoni’s Emilia Dębowska. “Our focus on employee well-being ensures that our facilities remain attractive, safe, and sustainable in the post-pandemic world. By upgrading certification to BREEAM Excellent level, we’ve ensured that our facilities provide, among other things, optimal air quality, acoustic and thermal comfort and enhanced lighting to promote a healthier working environment.”
As part of this, Panattoni have even gone so far as to create pocket parks around their investments whilst planting thousands of trees and shrubs and creating substantial wildflower meadows. “These solutions directly contribute to the overall health and satisfaction of employees, and illustrate our commitment to a sustainable and people-centric approach to benefit the well-being of our employees, customers, tenants, communities, and other stakeholders,” adds Dębowska.
Measuring Success
Yet how exactly should industry players be measuring the success of their ESG policies? For all, the results game has taken on a multi-faceted style. “At MDC2 we have a 100% staff retention rate and our team really believes in working to a higher standard to deliver better quality, demonstrably,” says Jeremy Cordery. “We are undertaking our company and asset baseline assessments and engaging our team in our materiality assessment.
“We’re also building the highest rated BREEAM Outstanding building in Poland. Higher rated buildings have a higher value in the eyes of our investors, possibly by up to 50 bps when compared to lower-grade projects, and investors are actively seeking to boost their portfolio ratings and are starting to pay for this through better yields.”
Such a defined approach is in step with others. “We’ve implemented a set of KPIs that cover all relevant ESG areas,” says CTP’s Adam Targowski. “Our KPIs focus on carbon footprint reduction, renewable energy production, water conservation, accessibility, social engagement, diversity, code of conduct training, and other important areas. By measuring our performance against these KPIs, we ensure that we are meeting our ESG commitments and making progress towards a more sustainable future.”
By doing so, CTP have followed a holistic strategy. “We have been committed to this approach from the outset, and now we are focused on institutionalizing ESG within our organization,” continues Targowski. “We believe that renewable energy production presents a compelling business opportunity and we’re continuing our investment in developing our capabilities across all our markets. By aligning our ESG goals with our long-term business strategy, we aim to create value for our stakeholders while contributing to a sustainable future.”
If anything, judging ESG performance has become an intricately delicate affair, a point underlined by Ghelamco’s Jarosław Zagórski. “We measure our ESG achievements both through real, measurable effects and image-related ones. Thanks to our ultra-modern, energy-saving systems, we’ve already been able to reduce the energy demand in Warsaw Unit by up to 30% compared to competing office skyscrapers. In addition, thanks to the use of energy from our own photovoltaic farms, CO2 emissions for our buildings throughout their life cycle are to be reduced by over 50%
“Specific actions taken by us as part of the ESG strategy also have their image effect, which we have witnessed by way of how often we have been invited to various types of ESG events, asked for expert comments on this topic, and also received awards for achievements in this field.”
Visible factors, of course, have remained core to any assessment. “We measure the success of our ESG policies through a combination of key performance indicators and external validation based on building certification, which signify adherence to strict environmental standards,” says Panattoni’s Emilia Dębowska.
“By consistently analysing data relating to our certifications, we can measure our progress and make ongoing improvements. This data-driven strategy thus enables us to effectively assess and enhance our ESG performance. For example, our certified buildings result in a power consumption reduction of up to 60% and savings of at least 50% in energy and water usage, which has translated into a reduction of approximately 230 tons of CO2 emissions per year.”
Innovation
Admirable as these accomplishments have been, perhaps one of the more encouraging elements has been the creativity that it has fostered. Not content with simply doing as others have done, the real estate segment has sought to actively lead by example.
At MDC2, for instance, the firm have introduced a company-wide holiday in the first week of July in addition to their annual leave allowance. “We also have a ‘million for a million’ policy where we put EUR 1 million on the table each time we build one million sq/m of space,” says Jeremy Cordery.
As expected, environmental solutions have also been emphasised by industry leaders. “We announced a ground-breaking project to build photovoltaic farms with a total capacity of 10 MW,” says Ghelamco’s Jarosław Zagórski. “We strive to use the energy produced from renewable sources to power entire office buildings, both ongoing investments and our own office space. The innovations we use that distinguish Ghelamco from the competition also include a highly energy-saving Building Energy Management System, Signal OS operating system for buildings with their own applications, and anti-pandemic solutions. As a developer, we want to achieve full energy neutrality by 2025.”
Panattoni are equally emphatic in their green crusade, something manifested by way of the firm’s ongoing campaign to reinforce all roofs with photovoltaic installations. “We’ve already adapted 1.5 million sq/m of roofs in Europe, and we have another several hundred thousand square metres in progress,” says Dębowska. “Another innovative practice is equipping our facilities with furniture from the wind turbines, meaning that not only do we promote renewable energy sources but also support their recycling efforts as well.”
Solutions for green energy are going even further. Last Autumn, in the Dutch town of Heerenberg, an innovative system was installed on a Panattoni building covering 24,000 sq/m, which combines solar panels with an energy storage system operating in an off-grid scheme. The smart energy management system – connected to a battery – ensures that surplus solar energy is temporarily stored and made available when the demand for energy exceeds its supply.
Every bit as impressive has been the degree with which related industry segments have also broached the ESG topic, whether it be banking or insurance. David Yearn of REassurance says: “ESG has been a welcome addition to the conversation in terms of insurance, and the focus upon renewable energy projects, environmental impact assessment, water drainage and pollution are all areas we have seen a rise in enquiries.”
Continuing, Yearn speculates that this will only continue in the future. “Specialist insurers are adapting and developing new products. I fully expect that as new taxonomy regulations come into force from 2024 we will see more evolution with regards to insurance products for transactional risk in real estate.”
Tellingly, neither is he alone in spotlighting the increased attention being given the ‘S’ and ‘G’ of ESG. “These are often overlooked when the subject is discussed, but socially the team at REassurance is committed to best practice and social fundraising, and for ‘G’, we operate in a regulated industry so governance is a large part of our daily lives.”
Such thoughts are in line with Peter Klopf of Erste Group Bank. “We are aware that as a bank, all our actions also have an impact on the environment, as well as on the social cohesion of our societies,” he says. “This starts with the financial services we offer our retail and corporate clients and also includes the way we run our own business.
“Due to the enormous negative effects of the climate crisis on the environment and people, we are focusing intensively on supporting the green transition in addition to continuing our efforts towards inclusiveness in society – we firmly believe that Erste Group’s economic success in our region can be sustainable only if the green transition is successful and social justice is advanced. These two dimensions associated with the long-term prosperity of the region are perfectly aligned.”
The Future
The swiftness with which ESG has come to dominate dialogue has been striking, but rather than elicit a cloudy and muddled response, we have seen the market’s main players rise to the plate. Of course, whilst no crystal ball exists to forecast what happens next, it can be assumed that the all-encompassing prominence of ESG will increase only further.
“For buildings, at the time of writing the emphasis remains squarely on the E of ESG,” says Richard Hallward, founder of CEEQA. “However, it is probably true to say that a building demonstrating the highest levels of cutting edge innovation and standards is the reflection and embodiment of a culture of change as well as the change itself. In short, green building certification still matters, but it’s not the only thing.
“CEEQA has long championed intel and advocacy for environmentally sustainable buildings and business since its first Green Debate in 2008, from which its long-standing ‘Green Leadership’ awards emerged. Only the test of time will tell if the ESG Champion Awards can surpass CEEQA’s longstanding awards for Green Leadership as the barometer, and an accurate measure, of all-round sustainability, but the thinking is, they probably will.”
