Anu Arnover: A Wave of Green Regulation Lies Ahead. Is Our Real Estate Market Ready for This?

A few years ago, construction and environmental protection were not considered to be synonymous terms, but this is changing. The Energy Class A requirement will already apply to building permits from 2020, and the EU Taxonomy, or Delegated Act on Sustainable Investment, the first package of which entered into force this year, has brought many changes to our economy. Taxonomy establishes clear assessment criteria to determine which economic activities make a significant contribution to the objectives of the European Green Deal. What can be expected and what should real estate companies prepare for now?

The EU’s focus on the real estate sector is understandable: it is one of the most energy-intensive sectors and has the largest carbon footprint, making its impact on sustainability goals crucial. Buildings in Europe produce 36% of greenhouse gas emissions and use 40% of all energy. The largest portion, more than 80% of energy, is used for space heating, cooling, and water heating. The scale of the problem is illustrated by the fact that there are more than 30 million buildings in the EU that are over-consuming, i.e., that use 2.5 or more times more energy than the average building.

As recent years have shown, this environmental damage has not gone unnoticed in the EU institutions and ambitious targets have been set to reduce the impact. Achieving them, however, will require contributions not only from the construction sector, but also from existing real estate owners. In other words, your office from the early 2000s and your private house built ten years ago also need to use less energy. But what does it entail?

Requirements for new buildings will become even stricter, and the energy efficiency of existing buildings will have to be significantly improved when they are renovated.

The aim of EU Taxonomy is not only to steer companies towards sustainability, but also to create an equal playing field, and make it clear and easy to understand what green investment is. For example, the first set of the EU Taxonomy assessment criteria, which came into force this year, has already produced results: some investment funds have lost their sustainability label. In order to regain the right to be called a sustainable fund, a fund should either ensure that the companies they finance are sustainable or withdraw from them and change the investment direction. Whichever path is chosen, the direction is clearly the same.

Sustainability as investment

EU Taxonomy is also important for banks, as our activities are strictly regulated. At the same time, in order to stay one step ahead of regulations in the area of sustainability, SEB sees its role not only as a funder of sustainable business, but also in helping its current and new clients to catch up. In 2017, SEB Group issued its first green bond in the amount of EUR 500 million, and this year a new issue was made, already worth EUR 1 billion.

All these funds will be invested in a range of private sector projects with a significant impact on sustainability. Companies that meet the viability criteria will also be able to take advantage of a green loan, which is already available in Estonia. SEB Estonia provided the first such loan in October 2020, when it financed the construction of solar parks with EUR 1.7 million. We also came out with a green home loan in January.
 
In all of this, it is important to understand that efforts and expenditures in the real estate sector for sustainability should not be seen as an expenditure, but as an investment.
For real estate managers, such investments lead to lower maintenance costs; for landlords, to higher rents; for sellers, to higher values and sales prices; and for developers, to much greater interest from investors and financial institutions. In the big picture, sustainable real estate usually means lower risk and higher long-term value.
 
What should real estate companies do to be more sustainable?

As a first step, you should map and assess your current situation and your activities: where, how much, and what waste or pollution your company generates, and how much and what energy resources it uses. With this knowledge, you can decide which changes would be most necessary, or would have the greatest impact, and then set sustainability goals that you want to achieve over the next three, five or even ten years.

The second step is to change your thinking: don’t just focus on the cost of new solutions, but also consider their benefits, cost-effectiveness, and cost-efficiency. Thirdly, involve as many colleagues, partners, and clients as possible, because every small change is important to achieve results.

It should not be expected that the targets set will be achieved immediately. But even if there are no opportunities or technologies today to reduce energy consumption and pollution in buildings, to replace building materials or to switch to renewable energy, this does not mean that these opportunities will not exist in the near future.
Sustainability is not a goal in itself – it is a journey, and the goals you set are milestones. So the sooner you start, the sooner you get there, because there is no turning back: requirements and rules are tightening, sustainability is gaining a competitive edge in the market, and the first package of EU Taxonomy assessment criteria is just the beginning. So it is up to the entrepreneur to decide whether they want to be at the forefront of all this and lead the way for others, or remain at the bottom of the increasingly stringent minimum requirements.

Anu Arnover
Head of the Real Estate Division of Corporate Banking at SEB

Additional information:

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