Niklas Wiik, Sustainability Manager at CBRE Finland, joins KPMG’s Fiona Halpin to discuss the role of ESG in the real estate industry and more specifically they talk about the net zero transition.
How has ESG work developed in the industry, what are the current hot topics, how does the net-zero pathway look like, and what kind of challenges does the future hold for real estate industry and ESG – these questions, among others, are discussed.
ESG plays a more prominent role in how companies operate now than ever before
Previously, the emphasis has been on the E in the ESG but in the recent years the other aspects of ESG, meaning Social and Governance, have received increasing attention. Niklas sees that the role of ESG has developed significantly.
— ESG was earlier seen as an add-on whereas ESG nowadays is seen as a way to manage and minimize risks. ESG data and ratings have become a component of risk management for most companies and a clear part of their investment strategy.
However, the approach to ESG is not anymore limited only to risks but rather the focus has changed from risks to opportunities.
— As the role of ESG has evolved in real estate in the recent years and the know-how among people, thus have the opportunities increased for everyone, says Niklas.
The industry is moving to the right direction, but the change should happen quicker. In terms of ESG, the real estate industry’s current status varies significantly, e.g., highly advanced office buildings and work-in-progress light industry.
For current hot ESG topics in the industry, three topics are especially salient:
- EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR)
- Net zero transition due to increasing energy prices (European energy crisis)
Net zero transition in the real estate industry
The building owners that Niklas meets are focusing on improving their net zero carbon strategies at the portfolio level and making decarbonization plans for their assets, mainly focusing on the operational carbon.
The approach to address the operational carbon is straightforward: map the current situation to create a baseline and then look at the technical systems, e.g., heating system, to find opportunities for improvements.
— The most important thing is to have a strategy in place with clearly defined goals at the portfolio level, says Niklas.
When it comes net zero plans, no one-size-fits-all solution exists.
— Net zero carbon plans should always be with asset specific improvements, says Niklas.
As an example, one can consider two different heating systems, oil and geothermal, and how the improvement for those solutions differs.
Green building certificates are a good start, but they don’t get you far, as Niklas explains that due to lack of regulation in the field, the certificates are seen more or less mandatory by the investors. Additionally, green building certificates have a strong emphasis on the environment, so if one wants to show commitment towards social and governance aspects, green building certificates alone aren’t enough.
The answer to net zero transition isn’t always starting from scrap. Often the most cost effective option is to extend the technical life span of current systems and solutions and optimize them. An excellent net zero plan also considers the occupiers and especially the communication between owner and occupier to improve the already existing cooperation.
Finally, setting the level of ambition is a crucial part of the process. Do you plan to meet the minimum requirements, or do you see ESG work as a strategic asset?
Niklas expresses his opinion on the topic.
— Regulation should only be seen as the lowest level as high-striving investors and asset owners will need to exceed the regulation to differentiate from the mass and this something that we are only starting to see.
What can be expected in the future?
The energy crisis in Europe has brought energy and energy efficiency in the spotlight but as we get through the winter, the perspective to ESG should broaden again, taking into considerations all aspects of ESG. Climate change will challenge the industry in the future.
— Climate change will likely prove to be the biggest business disruption of the 21st century, as it includes physical risks, transitional risks and new requirements for owners and investors – all of it is interconnected and will require funding, says Niklas.
Niklas is also concerned about the challenges caused by the need for retrofitting. In Europe, 85% of the buildings were built before 2001 and 85-90% of them will still be standing in 2050. The annual investment gap regarding retrofitting in EU countries is over 270 billion euros and thus the maintenance backlog increases rapidly. The retrofitting will challenge and disrupt the market in the coming years.
The challenges are demanding but not impossible. To address the challenges that the future entails, more people with ESG expertise are needed in the industry.
Listen to the full audio version
Listen to the full audio version of the interview, where Niklas Wiik and Fiona Halpin discuss the role of ESG in the real estate industry.