European real estate fund managers push ahead with ESG agenda

It has been a noisy few months for the environmental, social and governance (ESG) topic in real estate. If Donald Trump’s election campaign – to the tune of “drill baby, drill” – has resulted in an apparent victory for fossil fuel magnates and climate sceptics across the pond, a new consensus around carbon trading at November’s COP29 climate summit suggests that mitigation strategies could help project developers win government backing for ever-more ambitious schemes. 

While there is some apprehension that the US, under Trump 2.0, may be conspicuously absent from carbon talks in the future, perhaps even withdrawing from the Paris Agreement again, real-world scenarios, such as devastating floods in Spain and Italy, keep environmental issues firmly front of mind in Europe. 

And whatever the radio interference from geopolitics, it seems apparent that ESG will maintain its primacy in real estate strategies over the coming years in Europe, according to Robbie Epsom, head of EMEA sustainability at CBRE Investment Management. “No aspect of ESG is slowing down in the European market,” he says. “There are always going to be ups and downs, but political cycles are very short in every country. If sustainability waited for various swings to resolve, we would never get anything done.” He adds: “Business plays a big role in providing that continuity of action between political cycles.”

Physical risk

Looking at the chief areas of ESG in which CBRE Investment Management has made progress, Epsom notes that “net zero is almost business as usual – pathways have been integrated into our investment processes. Over the coming year, we’ll be looking at how we can make that even more efficient – what areas we need to tweak”.

He says that one key area the firm is increasingly addressing is physical risk, which “is much further behind transition risk across the industry”. This is reflected in a smaller pool of experts available to consult on the topic. Physical risk preparedness involves the usual collaboration with regulatory bodies, he explains, and is likely to see increased collaboration between the real estate and insurance industries. “Insurability is an increasingly important topic in the US market, where there is often more exposure to physical risk than in Europe,” he says, with the worst-case outcome being an insurance rejection. 

While such cases are not currently making the headlines in Europe, there is a conspicuous increase in climate volatility, particularly from freak weather events. Epsom sees EU taxonomy starting to address the topic, particularly in the ‘do no significant harm’ criteria, while he also thinks that insurers have the potential to be partners rather than antagonists. “Insurance companies are probably further ahead than investment managers in terms of integrating physical risk into their analysis,” he says. “We need to get on a level with them – ideally, we’d be one page ahead and anticipate their future expectations.”

Reporting requirements 

Evolving EU and UK legislation in 2025 is likely to provide the carrot and stick for many landlords, with areas such as the EU’s Corporate Sustainability Reporting Directive (CSRD) reaching a more formalised stage. Companies in the EU have been obliged to consider the new reporting rules for the first time in the 2024 financial year in preparation for reports published in 2025, which should disclose information on what large companies see as the risks and opportunities arising from social and environmental issues and the impact of their activities on people and the environment. 

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS), which have been developed by EFRAG, previously known as the European Financial Reporting Advisory Group, an independent body bringing together various stakeholders.

Major landlords in the UK will also need to stay abreast of EU taxonomy changes. Sandra Fives of ESG and technical advisory consultancy Catalyst notes that the consultation on the UK’s incoming green taxonomy, released at the end of 2024, will close in mid-February, with a view to introducing legislation for 2026. In the meantime, the UK’s Sustainability Disclosure Requirements (SDR) are leaning on EU frameworks. “The SDR, which came into effect at the end of May 2024, with expected disclosures and reporting from 2025, is rooting a lot of its evidence of the effects of ESG measures in EU taxonomy, so it’s worth understanding that to be able to create pathways that demonstrate the sustainability of your assets,” Fives says. 

Catalyst works with large, listed asset managers as well as smaller, unlisted firms, some of which “need a lot of support in terms of defining their ESG strategies and implementing them”, she says. “We are getting into the implementation stage with a number of clients, but they are increasingly aware that this is not just about legislation, but about resource efficiency and value protection management.” 

This shift in perspective is crucial to keep the industry engaged with the topic. “There has been a lot of negativity around ESG due almost to a mis-selling point; that investors were told that any ESG investment would pay higher dividends. As with any investment, ESG is not the only driver of performance or return,” Fives points out. 

While she is aware of negativity around the topic coming from certain jurisdictions within the US, she sees Europe as having an opportunity to confirm its leadership position now which could have an impact on global capital flows. “Europe is providing a framework that clarifies what a sustainable investment looks like. That’s why investors come from all over the world to invest in European real estate.”

Industry action

Elena Lutterkort, head of sustainability at Savills France, sees the European industry mobilising to take major action this year. “For many it has been a case of tackling the easier elements so far – they will need to do the hard parts now,” she says. Much of this will involve significant capex, she notes, adding to the complexity. “Some of the measures that building owners will have to introduce will have a longer payback that goes beyond 10 years – companies don’t have the tools to account for that.” For example, many European landlords and business owners who are still using gas boilers will need to plan to change to heat pumps imminently, requiring an overhaul of an entire building’s system in some cases.  

Driving much of the industry’s evolution will be regulatory events. “Once elements are defined by regulation, you just have to take on the cost and figure it out after,” Lutterkort says. 

She also sees a need for further dialogue with the insurance industry on physical climate risk. “For some insurers, the easy solution to physical risk is leaving a location,” she notes. “Of course, that isn’t a solution, you can’t just expect an exodus from cities affected by climate change. Governments and insurers need to address the gap between reparations and adaptation in order to provide greater incentives for making buildings climate-proof.”

Tenant demand

For a number of leading funds, getting and staying ahead of incoming legislation makes the most sense. Real estate investment manager Feldberg Capital has been driving sustainability across a number of its London-focused workplace strategies, backed by strong tenant demand. Cora, Feldberg’s recently launched £500m (€602m) brown-to-green workplace impact fund, is targeting offices ripe for redevelopment in London’s West End in locations such as Soho, Marylebone and Fitzrovia. 

The fund has already acquired two buildings – 21-25 Bedford Street and 8 Bloomsbury Street– which are both being transformed into modern ESG-led workplaces.  

“With Cora, we are seeing occupiers engage with the impact strategy much more than they might have done in the past,” says Jon Cochrane, head of asset management at Feldberg Capital, citing the presence of “international clients and firms with their own ESG strategies – in which their office plays a big part”. 

Occupiers want to see a “net zero trajectory for decarbonisation, and evidence of the resilience of the asset in the face of freak weather events, for reasons of business continuity”, Cochrane notes. “IT and comms teams will come along to inspect assets and ask a lot more questions about whether buildings are equipped to handle overheating, flood risks or power outages.”

Social factors also come in as part of a “holistic set of requirements that include employee retention”, he says. “Tenants tend to leave a building due to location factors – they might want more amenities nearby – or due to the quality of the fit-out.”

The logistics sector has received less ESG scrutiny than offices in the past, but Paul Crosbie, newly appointed business space & logistics director for London-based real estate developer LS Estates, thinks that a proactive approach is best. “We are leveraging our extensive experience in developing Grade A office space across the logistics sector with our latest strategy,” he says. “I think it’s inevitable that industrial and logistics assets will face the same stringent rules and regulations as other parts of the built environment. The carbon problem within real estate is now obvious and we need to address it.” 

In fact, tackling operational carbon – one of the metrics that is easiest to measure – is a priority for LS Estates as it expands its logistics platform. Crosbie notes that the earlier sustainable solutions are integrated into a building’s design, the better the whole-life outcome. “Asset obsolescence and end of life matters too – creating structures which can be dismantled and reused is far superior to demolition and recycling,” he says. 

LS Estate’s Decarbonise to Core strategy focuses on building new to a very low embodied carbon target, and a ‘retrofit first capex’ approach for standing properties. “Fortunately, there are effective solutions we can borrow from our office experience for both,” says Crosbie. “Quick fixes for standing assets include electrification, improving insulation, LED lighting and adopting smart technology. For new builds, the biggest mover of the dial lies in addressing carbon in materials like concrete and steel, both of which now have greener solutions.”