ESG accountability: lessons for the UK from Europe

COMMENT This time four years ago, colleagues and clients were returning to their desks having combed through a chunky piece of text over their Christmas and new year breaks. The topic was the new EU Taxonomy regulation, released in June 2020 in the Official Journal, in the middle of Covid lockdowns and not too long after the passing of the EU’s Green Deal in December 2019. They worked through that highly technical document to understand what new sustainability criteria and green finance opportunities were being placed on their business. Today, we are in a markedly different position. The EU Taxonomy has performed exceptionally well in turning European real estate and construction into global leaders in sustainability and green investment. It’s no longer a select few sustainability specialists who feel they need to grasp the detail; ESG is now seen as a lens through which to view the business as opposed to an extra layer to consider on top. And although the geopolitical situation is not rosy and COP29 was, predictably, a bit of a cop-out, the outlook for ESG is bright. Taking the lead Why? Because the transition to net zero is increasingly seen for what it is: value protection and creation. It future-proofs real estate, particularly amid the impending arrival of a UK Taxonomy (albeit the EU Taxonomy still applies to UK assets where the fund is domiciled in the EU); it reduces energy costs; it enables access to green finance; and it increases property value. Those facts mean change is being driven from the top. When Catalyst entered the ESG consulting space, it was focused on compliance – ensuring that clients were doing everything they needed. At that time, ESG within real estate was championed by a few individuals, either ESG specialists or people who were passionate about making a positive impact. As needs evolved, so did the infrastructure around ESG to enable it to grow, and we saw chief sustainability and impact officer roles popping up that would report directly to the board. That was a major shift, ensuring boards had a direct responsibility to validate data and thus shifting accountability up through the organisation. Today, chief executives themselves are taking the lead – and, in a reflection of the accountability to which they’re held by their board and stakeholders, including employees, they’re getting into the granular data. In the same vein, chief financial officers are increasingly emerging as primary stakeholders on sustainability given they will often find themselves responsible for sustainability reporting – not because everyone else has passed the buck on a tedious technical job, but rather because of its importance when it comes to securing good financing terms, including green loans. Next steps That those who are accountable for sustainability are those who lead the organisation should give us reason to celebrate. Obviously, there’s further to go – so how, in the next five years, can we ensure the UK’s real estate sector continues to improve? Accountability, unsurprisingly, remains the main theme that the UK can learn from Europe’s leaders in sustainability. Take France. The introduction of the décret tertiaire has established a progressive system to reduce operational carbon emissions. For buildings bigger than 1,000 sq m, emissions must be reduced by 40% in 2030 (compared to 2010 or a baseline year of their choice between 2010 and 2020), 50% in 2040, 60% in 2050, and so on. This means owners and operators who need to report on their data annually on a centralised digital platform need to come to an agreement and take responsibility – or both will be held accountable. This approach has also ensured a much more thorough data collection exercise than can be found in many other jurisdictions. Meanwhile, the Nordics are leading the way when it comes to placing an equal emphasis on existing assets. In Denmark, whole-life carbon assessments must be carried out for every building, and generally we see Nordic investors take the same approach when they’re buying outside of the far north. If an Irish or British building owner were to look for Nordic capital, they can be expected to be asked for a full life cycle assessment of carbon. This pressure arising from capital flows raises the bar across Europe, ensuring that money follows thoroughness. There remains much more to do. But as we head into 2025, we should take reassurance in knowing that, quietly, we’re getting on with the job – at every level. Sandra Fives is a chief strategy officer at Catalyst