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Partner, Real Estate at PwC Germany
Sustainable strategies and solutions are all the rage. This trend is also evident within the real estate industry as this sector is one of the major CO2 emitters. Accordingly, the public, investors and policymakers are calling for changes in real estate companies' business models. The debate surrounding compulsory purchase orders in Berlin, rent holidays during the COVID-19 pandemic, climate change and sustainable construction offer proof: the broadest range of stakeholders – investors, employees, tenants, the public and policymakers – are leaving their mark on how business is done in the sector.
This trend poses significant challenges for the industry. The greatest hurdle lies in implementing regulatory requirements at the EU and national levels. But the real estate industry also faces the challenge of data management for increased transparency as far as sustainability is concerned, as well as the task of integrating sustainability into the other corporate activities.
“The Fridays for Future movement and the new regulatory conditions set out in the EU's sustainable finance action plan have enlivened the discussion surrounding the topic of sustainability. But is sustainability taking root in corporate portfolios – or only in people's minds?”
Sustainable construction and buildings are not new issues contemplated by the real estate sector. What is new is the momentum that has picked up around the topic of sustainability in the past two years. One thing that has become clear during the COVID-19 pandemic is that companies that have a high level of strategic resilience have an advantage over companies that haven't given any thought to such crisis scenarios before. This issue will remain at the forefront for the sector because the challenges arising from a changing climate can lead to new crises for the real estate industry. Companies that consider the potential impacts and the fitting solutions to them today will be at a clear advantage tomorrow.
The issue of sustainability and climate change is particularly complicated in the context of real estate. In order to take as structured an approach as possible, our experts break the topic down into five sub-areas:
Due to high levels of energy consumption and a strong dependence on fossil fuels such as oil and gas, real estate represents a key element in implementing a more sustainable energy supply. There is significant pressure to reduce carbon emissions from buildings by over 80 percent compared to 1990 levels. Actively managing the energy transition away from fossil fuels to renewable energy sources significantly reduces the climate-related risks for investments. It is still not clear what form this energy transition will take. However, with the help of scenario analyses, different transformation routes can be weighed and promising strategies can be developed for the different scenarios.
A relevant portion of CO2 emitted by buildings relates to the construction materials used. Concrete and steel are highly energy-intensive, robust building materials that can outlast a building's normal useful life. A building's CO2 emissions can be significantly reduced if building materials no longer required are recycled, thus taking a further step towards a circular economy.
Because they are responsible for significant emissions, buildings have a strong impact on our climate. Different investments perform very differently. One key challenge is that the data on emissions by buildings is often not sufficient or available. That's why real estate companies usually have to make assumptions to appropriately quantify emissions so that they are able to correctly adapt the unique features of the buildings. Impact valuation helps them to formulate their own objectives. Such analysis makes it possible to quantify how the investments contribute to rising temperatures through emissions, while also gauging the influence of greenhouse gases trapped within the building.
Retail and institutional investors are placing greater store in investments satisfying certain non-financial standards. Real estate investments, which for instance are suitable for green bonds, can combine improved terms and conditions with a positive impact. Strategic screening and identification of suitable assets are crucial in order to enable sustainable financial products to be offered.
Environmental, social and governance criteria also need to be taken into consideration in the acquisition process. Those who address these issues as part of their ESG due diligence are able on the one hand to identify interesting investments while on the other collecting relevant data when a property is acquired.
Companies that take a strategic environmental, social and governance stance early on will benefit in the long run. However, they must first clarify a number of issues:
How can we strategically align our business model with environmental, social and governance considerations?
Which regulatory requirements result from the EU Action Plan for Sustainable Finance?
How can real estate and buildings be valued in terms of risk, transparency and license to operate?
What do stakeholders such as customers, investors, employees and the public expect from us?
How can we optimise costs and efficiency while remaining as economical as possible?
Our experienced real estate experts will help you implement ESG value drivers as part of a transformation of the entire company and contribute their sector-specific expertise in all projects.
Our portfolio covers the following areas:
Strategy for financial service providers: Our experts help companies in the financial services industry by incorporating real estate into their strategy. In doing so, we take into account the requirements of stakeholders and regulators. We define your organisation's strategic objectives and prepare gap analyses. In this way we ensure a holistic and targeted ESG transformation of your company. This transformation includes a portfolio-based, active management of various risks, such as those resulting from climate change and investors' requirements for social aspects of the assets.
Strategy for corporates: We help companies in all industries to integrate ESG factors holistically, thereby increasing their impact both internally and externally. We will help you design and implement innovative and sustainable Corporate Real Estate Management (CREM) systems. In doing so, we rely on collaborative, digital and impact-related concepts and take a long-term, future-facing strategy into account.
Due diligence: Our experts will analyse sustainability at the asset, portfolio and corporate level. They will identify room for improvement with respect to defined, market-conform ESG criteria.
Valuation: We will help you assess and quantify sustainability factors and risks in the valuation of properties and analyse their impact on prices and cash flows. In addition, we will provide relevant input to quantify the impact of different energy and climate scenarios and the associated risks on the value of buildings. There is also the possibility of valuing buildings individually or analysing the performance at a portfolio level.
Legal integration: Our experts will help you design and implement sustainable contracts to transform and manage tenant and service provider structures. We will also advise you from a legal standpoint to help you achieve your sustainability goals, taking into account legal issues such as data protection requirements.
In our projects we can draw on extensive tools that support us in identifying climate-related financial risks for the real estate portfolio. This also includes scenario analyses and defining transformation routes.
We offer a holistic and integrated consulting approach for your end-to-end solution with interfaces to all relevant industries and business areas within our network. With our industry expertise, combined with over 20 years' of experience in sustainability, we turn complexity into true added value for your business activities. We will work with you to shape a sustainable future and support you as a trusted advisor in turning your ESG transformation into reality.
“ESG requirements need to take hold not only in our minds as soon as possible, but also within our organisations, processes, systems and real estate portfolios. The objective is clear; we'll find the way there.”
With our latest extension, you can assess how your building would develop in comparison to market leading climate scenarios emphasizing the specific energy and emission intensity. You can model different renovation measures to stay aligned with the scenario pathways while estimating your (cost-optimised) renovation and investment needs.
Partner, Real Asset Financial Services & Sustainability Consulting, Frankfurt am Main, PwC Germany
Tel: +49 160 7181284
Global Real Estate Leader / German Real Assets Leader, PwC Germany
Tel: +49 175 4340515