The rise of ESG: the evolution of environmental regulations in Europe

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position. Please refer to official GRESB documents for assessment related guidance.

The real estate sector in Europe accounts for nearly half of the region’s energy consumption and more than a third of CO2 emissions. Despite this reality, only 1% of real estate inventory undergoes renewal each year. Faced with the climate crisis, European countries have set themselves a common goal: achieving carbon neutrality by 2050. A growing number of regulations are emerging on a European scale, although given the scope of ambitions, their implementation is often difficult and slow. This article offers an overview of the measures taken by the European Union, and the progress of different member states on ESG (Environmental, Social and Governance) issues.

Developments in the European regulatory framework

European regulations implemented to date

The progression of European regulations can be divided into three distinct periods:

• Liberalization of the energy market for economic ambitions (through 2005) 
• Initial climate objectives and definition of the current framework (through 2020)
• Carbon neutrality (current period)

Market liberalization led to the unbundling of electricity and gas distributors and producers in 1996, as well as the introduction of the Energy Performance of Buildings Directive in 2002. These developments paved the way for the first climate targets starting in 2005. 

In 2010, an amendment to the EPBD (Energy Performance of Buildings Directive) required that new buildings in Europe be as close as possible to zero energy consumption by December 31, 2020. 

In 2012, the EED (Energy Efficiency Directive) announced that European leaders must set national targets for energy efficiency. The idea of a climate plan specific to each country was truly advanced four years later with the Clean Energy for all Europeans package, meant to define energy savings as a central principle for the European Union. Finally, in 2018, the amended EPBD and EED imposed the establishment of a long-term renovation strategy as well as annual energy savings. 

Upcoming European regulations

The goal of new regulations will be to achieve carbon neutrality across Europe by 2050. In June 2021, there will be a review of the Energy Efficiency Directive and the Energy Performance of Buildings Directive. This discussion will reassess year-to-year targets to make sure the goal of halving greenhouse gas emissions by 2030 is reachable. Other Europe-wide initiatives, such as the EU Taxonomy, will also support the goal of achieving carbon neutrality by 2050.

Did you know?

The EU Taxonomy is a classification system establishing a list of environmentally sustainable economic activities, with the aim of promoting investment in sustainable projects and activities. Ex: for buildings, a maximum DPE score (grade A) might be required in order to be considered environmentally sustainable.

To reach these ambitious goals, each European country must arm itself with the adapted strategy, based on the following key steps:

1. Taking stock of current energy consumption and greenhouse gas emissions
2. Identifying the action-levers for a drastic reduction in consumption and greenhouse gas emissions
3. Establishing concrete, prioritized action plans for the short, medium and long term
4. Monitoring progress and the impact of actions in place, to ensure that objectives are met.

National initiatives across Europe

Environmental progress varies from one country to another, each member state determining its own regulatory path toward achieving the EU’s bold objectives.

In terms of energy regulations within the real estate sector, France, the Netherlands and the United Kingdom are among those leading the way in Europe:

• France has implemented the tertiary decree, requiring all commercial buildings over 1000 m2 to reduce their energy consumption (vs 2010) by -40% in 2030, -50% in 2040 and -60% in 2050, or to respect a maximum consumption threshold defined by building type.
• Germany has committed to reducing its greenhouse gas emissions by 40% between now and 2030. To achieve this, it intends to reduce emissions from the real estate sector by more than 60% as compared to 1990.
• In the Netherlands, new buildings are now required to be carbon neutral and to use natural gas as much as possible (as in about 20 other member states). 

Other European countries are farther behind, including Spain and Italy, where too many buildings still have an energy performance rating (DPE) of D or lower:

• Spain is targeting a 23% reduction in greenhouse gas emissions by 2030. While this may seem less ambitious than its European peers, the country has also planned to renovate about 5 million m2 of building space per year.
• Italy has determined that, starting in 2021, all new buildings or those undergoing major renovations must have near-zero energy consumption.

As a property manager today, it’s essential to stay abreast of these different standards, to keep your assets in compliance with all applicable regulations and avoid any financial or market repercussions.

Despite the slew of regulations that have emerged in recent years, the process of reducing GHG emissions is still too slow. In light of this, private organizations like GRESB have created a number of voluntary initiatives to help move the market forward more quickly.

Did you know?

Regulations are based around 8 common pillars: 

• Reduction of greenhouse gas emissions
• Environmental performance index
• Energy performance regulations
• Energy performance labels
• Long-term renovation strategy
• Smart electricity meters 
• Energy saving requirements
• Definition of a near-zero energy building

Risk analysis & new challenges for the real estate sector

The resilience of any property portfolio is subject to two distinct types of risk:

• Expected risks: identified risks related to climate change (heat waves, droughts, rising water levels, etc.)
• Transitional risks: risks related to the socio-economic shift towards a new, low-carbon model (changes in economic and environmental policies, evolution of consumer preferences, emergence of clean or green technologies, etc.).

Both types of risk can have a negative impact on cash flows and asset values, leading to increased costs for the adoption of climate-friendly technologies and processes. Stricter energy policies in support of the transition to a low-carbon economy, for example, will most likely lead to higher pricing for assets linked to fossil fuels.

At the same time, the market is changing – as are stakeholder expectations. Investors are no longer focused solely on the financial value of their investments; the concepts of extra-financial asset value and responsible investment are now inescapable. Some regulations rely on these principles to implicate actors directly in this evolution. In France, for example, entities that fail to respect the tertiary decree will not only be charged a hefty fine; they will also be put on a public “name & shame” list, and may see their value strongly decline in the eyes of investors and other stakeholders.

To ensure the resilience of your assets, it’s critical to be aware of the associated risks – whether these risks are related to climate change or to market trends. This requires acting now, in a methodical and pragmatic way:

1. Take stock of the regulations that apply to your assets
2. Evaluate the environmental performance of your assets by collecting and analyzing your consumption and ESG data
3. Establish concrete action plans to ensure regulatory compliance
4. Monitor progress on a regular basis to ensure that you stay on track throughout the project and avoid unpleasant surprises
5. Capitalize on data already collected to apply for voluntary initiatives (labels, certifications, etc.) that will enhance your extra-financial performance
6. Take pride in your commitments and results and share them regularly with the market!

Faced with the risks of climate change, the European Union has formulated bold objectives for reducing greenhouse gas emissions in the real estate sector. On top of that, new market demands are also pushing real estate players to improve their environmental performance. It is now essential to grow the extra-financial value of your real estate assets, or you’ll risk seeing them lose value overall. This can be a complex prospect and you shouldn’t hesitate to turn to a qualified expert for support : from defining your strategy, to creating your ESG reporting, to implementing your action plans.