Facing the risks of climate change, the European Union has formulated bold objectives to reduce greenhouse gas emissions in the real estate sector. This article offers an overview of the measures on ESG (Environmental, Social, and Governance) issues taken by the European Union, and their equivalentsé implemented by different member states. First, organizations have to comply with applicable mandatory ESG reporting requirements. Second, they can choose the most relevant voluntary ESG reporting framework depending on their market and competition and select the most recognized asset ESG scoring tool. Finally, organizations may also choose from a wide variety of voluntary labels and certifications. We’ll get to see how they differ from one another, but first, we need to make sure the interpretations are clear. A certification is a procedure by which a third party gives written assurance that a product, process, or service conforms to certain standards. A certification label is a label or symbol indicating that compliance with standards has been verified. The use of the label is usually controlled by the standard-setting body.
National initiatives across Europe
To reach these ambitious goals, each European country must arm itself with an adapted strategy. Environmental progress varies from one country to another, each member state determining its regulatory path toward achieving the EU’s ambitious objectives. ESG labels in Europe generally take an all-encompassing sustainability approach, however, thematic labels pushing the transition to a low-carbon economy and climate social issues are also making headway. Labels are mostly private sector-led but governments have also started promoting national labels, such as the national SRI label in France, LuxFLAG, and Germany’s FNG label, which has been adopted by other countries. As the number of labels increases, it is not always easy for property and asset managers to fully understand what is being offered, especially because labels do not adopt the same approach. Alongside the development of labels, a quantitative approach has emerged in recent years, with ESG ratings of buildings, similar to ratings on performance quality. Labels, certifications, and ratings all aim to help investors choose responsible investment products. An important difference between labels and ratings is that the property manager takes the initiative to obtain a label, which is generally focused on certification, whereas the rating organization unilaterally rates a building, irrespective of whether the manager asks for the rating. Unlike labels, ESG ratings do not certify a portfolio ESG integration process or investment inputs with a specific methodology. Rather, ESG ratings generally aim to “score” the portfolio on sustainability with a rating.
As an asset manager and property manager today, it’s essential to stay up to date on different standards, to keep assets in compliance with all applicable regulations, and avoid any financial or market repercussions. The recognition of the labels and certifications on the market, due in particular to the anteriority and the internationalization of their standards, makes them relevant tools. These initiatives have the potential to simplify discussions between asset managers and their clients – as they know what ESG topics are taken into account, provided that the criteria for labeling are clear. However, while these labels and certifications can help certify a fund according to the categorization established by the different organizations, as their criteria are comparable and they potentially imply environmental and societal characteristics, they do not include any verification of the achievement of sustainable investment objectives – unlike EU regulations. For the time being, the vast majority of labels and certifications focus more on evaluating the asset’s performance than on measuring the results. Under the different regulatory waves, voluntary initiatives remain relevant as they are simpler and well-known. Choosing to include them in the strategy represents a respectable initiative that complements obligatory initiatives within the real estate sector.