Three letters have long been widely recognized in the real estate industry: ESG. This acronym stands for Environmental, Social, and Governance. Loosely translated, it refers to environmental and social aspects as well as issues of responsible corporate governance. Or, to put it another way, it refers to environmental and social sustainability. For a long time now, the “E” in ESG has been at the forefront of numerous discussions, decisions, and questions surrounding the development of new real estate projects, the renovation of existing properties, and investment criteria. The“S” and“G” aspects are also important, but they often take a back seat. In this blog post, we’ll take a closer look at each of these individual points and discuss their relevance to the real estate industry—and specifically to homeowners.
ESG and Sustainability
Treating the Earth as gently as possible—that’s probably what most people think of when they hear the term “sustainability.” And of course, environmental aspects are important: After all, for several years now, the effects of climate change have been increasingly evident in Germany and the rest of Europe—just think of the 2021 flood disaster in the Ahr Valley or the droughts in Southern Europe in the summer of 2022.
But environmental considerations have long been linked to economic ones as well. Those who use available resources as efficiently as possible not only reduce emissions but also save money. Companies that want to position themselves for the future can no longer avoid adopting more sustainable business practices. Private homeowners can save money in the long run by making larger investments now—such as purchasing a solar power system to generate green electricity .
"E" for Environmental
The “E” in ESG—for “Environmental” —includes measures for environmental and climate protection, the use of renewable energy, the reduction of emissions, and the responsible use of the planet’s limited resources. If a company wants to score points in terms of environmental friendliness, it must, for example, take steps to mitigate climate change,maintain the smallest possible carbon footprint, rely on wind and solar energy, protect natural resources throughout the value chain, or prioritize the shortest possible delivery routes in its logistics operations.
Reducing emissions is certainly one of the most important aspects when it comes to environmental friendliness and sustainability. This applies to businesses as well as to private homeowners. This shift toward reduced CO2 emissions is also referred to as the decarbonization of the building sector. By striving to reduce emissions, companies secure a more solid investor base and can enhance their image. Private homeowners can save money in the long term by making their properties climate-neutral as early as possible—for example , by generating their own electricity with a solar system or by reducing heating costs through the installation of a modern heat pump. Both groups will also avoid future fines that the EU is already planning to impose on buildings with particularly poor energy efficiency.
ESG and the Future Value of Real Estate
One of the key implications for both residential and commercial property owners is that, in the future, a property’s value will be significantly influenced by the extent to which it meets modern ESG standards. These include, for example , good energy efficiency and insulation, zero-emission energy generation through solar panels, and environmentally friendly heat generation using a heat pump.
To demonstrate such ESG compliance, there are so-called sustainability certifications. The most common certifications on the German real estate market are the U.S.-based LEED (Leadership in Energy and Environmental Design), the British BREEAM (Building Research Establishment Environmental Assessment Method), and the German DGNB seal (German Quality Seal for Sustainable Construction).
To receive such a certification, a property must earn points in various categories. Depending on how “green” a building is, it receives a certificate at different rating levels, typically divided similarly to Olympic medals: bronze, silver, and gold. There is also platinum, for which a building must meet the highest standards.
Such“green buildings” are expected to become increasingly prevalent in the market. Institutional investors, for example, are already investing their capital almost exclusively in so-called Article 8 or Article 9 funds. These are funds that place a particular emphasis on ESG factors in their investment criteria. In addition, buildings certified as sustainable generally command higher sale prices today, are easier to market, and—last but not least—are good for a company’s image. Private owners need to keep this in mind, especially if they plan to sell their property in the future and possibly move, or if they own multiple properties as investments. Buildings with poor energy efficiency will lose significant value in the future and, sooner or later, may even become unsellable.
Subsidies and Regulations
ESG compliance is no longer optional for real estate companies and property owners—it is now mandatory. This is driven not only by market demands and the expectations of real estate buyers but also by increasingly stringent regulations from the federal government and the EU. These regulations have long mandated specific emissions targets, compliance with which is monitored through mechanisms such as emissions certificates. As of January 1, 2023, several new laws have taken effect that impose additional obligations on property owners.
One of the most important is certainly the revised Building Energy Act (GEG). This law now mandates the strict EH-55 energy standard for both new buildings and existing buildings following renovation. Put simply, this means that to meet this standard, a house may consume no more than 55 percent of the primary energy demand of a reference house. This new regulation applies to residential buildings as well as commercial properties. Regulations are also becoming increasingly stringent at the EU level. For example, since 2021, the “nearly zero-energy building” has been the standard for new construction. Publicly owned non-residential buildings have been required to meet these requirements since 2019. Another goal of the new GEG is to transpose EU directives into national law.
Whenever the government imposes stricter requirements, it generally also provides support measures. In Germany, for example , this is done through the KfW development bank. One of the newest funding programs is the “Climate-Friendly Construction” funding guideline. It has been in effect since March 1, 2023, and supports new construction projects that meet particularly ambitious sustainability goals. Those who meet these requirements receive the government’s “Sustainable Building” (QNG) quality seal. The goal is to reduce greenhouse gas emissions from construction to demolition. It also aims to reduce the consumption of resources, land, and energy, as well as facilitate the recycling of building materials.
To advance the energy transition, the federal government has now also declared war on gas heating . To this end, the installation of heat pumps is being subsidized, and the installation of photovoltaic systems is set to become increasingly attractive for private homeowners. Recently, the purchase of such systems has been exempt from value-added tax, and those who wish to operate only a small-scale system are even exempt from income tax.
Greater Sustainability in the Rental Market Thanks to “Green” Leases
While the aforementioned green building certifications often focus solely on how climate-friendly a building is constructed, a property’s actual carbon footprint is also significantly influenced by its use. If the industry truly wants to become climate-neutral, it must also pay attention to emissions between construction and demolition and keep them as low as possible.
To achieve this, so-called “green leases” have now been introduced. In such a green lease agreement, both the tenant and the owner are typically obligated to use the building as sustainably as possible. Through appropriate clauses, tenants can be encouraged, for example, to consume as little energy and water as possible, produce as little waste as possible, recycle more effectively, and use the building or apartment in an environmentally conscious manner overall.
Since every building is different, each contract must be drafted on a case-by-case basis—there is no single “green lease” that fits all properties and all situations. For new construction, the option of a green lease agreement can be considered as early as the planning stage. This provides the most flexibility for energy-saving measures in the long term. Green leases offer not only environmental but also economic benefits. After all, when a building is used in a way that conserves water and energy, both tenants and owners can save money.
