A wave of sustainability: Capital allocation and financing drive momentum for sustainability and ESG in the real estate industry

Increased demands from authorities and market forces have brought sustainability, ESG, and carbon footprint to the forefront of the real estate sector. Investors who do not focus on optimizing their sustainability performance in properties, risk potentially receiving less attractive loans, lower rental income, and thus possible asset devaluation in the future. In an interview with Market Insight, this was evaluated by one of Denmark’s leading experts in sustainability in real estate.

”Sustainability has become a top strategic priority for all actors in the real estate industry in recent years, as the sector accounts for 40% of energy consumption in the EU, and 36% of CO2 emissions. Therefore, there has been regulatory and political pressure and increased requirements for transparent ESG reporting for real estate. With these conditions in order, companies and investors in the industry have started efforts to reduce their climate impact upstream and downstream in the value chain. I believe this trend is important in creating the conditions for capital allocation and financing to become central scaling drivers of the sustainable wave that will drive the green transition in the urban ecosystem.”

These views come from Rasmus Grosen Olsen, Sustainability Manager at Nordic Real Estate Partners (NREP), a North European urban development investor. In 2012, Rasmus was employed at the Council for Sustainable Building (then Green Building Council Denmark). The council works, among other things, to promote DGNB, the most widespread ”green stamp” for buildings in Denmark, and his award-winning master’s thesis from 2017 at CBS focused on the pension fund’s real estate investment strategy with DGNB as an essential element.

DGNB in explosive growth

”There has been much progress in the ten years I have worked with sustainability in the real estate sector. When I started at the Green Building Council, only a few buildings were DGNB-certified, and it was driven by pension funds like ATP and PensionDanmark. Many did not know what it was, and many were completely indifferent.”

”Today, DGNB is in explosive growth and is a common standard for banks, mortgage institutions, real estate investors, and the rest of the industry in terms of working transparently and systematically in the green transition of real estate. The development is exemplified, for example, by all major consultants - such as engineers and architectshaving sustainability experts. ESG has become an important part of the strategy and everyday life of more and more investors, and financial actors use DGNB as an ESG metric in their Green Bond Frameworks,” notes Rasmus Grosen Olsen.

Urgent problems

This is also the case at NREP, established in 2005, which today has approximately 700 employees and property investments in the Nordic region, Poland, and Germany. They focus on urban development and sustainability and manage properties totaling 7 million square meters worth up to DKK 150 billion. Their portfolio includes mainly residential-, office-, and logistics properties, as well as shopping centers in Denmark. NREP is owned by senior partners and Novo Holdings.

“NREP is founded on the idea that the best businesses solve problems. In the urban environment, climate change and sustainable transformation are some of our society’s most pressing challenges. We want to be part of solving these issues at NREP. Therefore, we actively work with our portfolio regarding sustainability initiatives and ESG. For example, we systematically and purposefully work to minimize energy consumption and thus the climate footprint of our existing buildings and reduce the embedded CO2 footprint in materials in new construction,” says Rasmus Grosen Olsen.

Regarding new construction, life cycle assessments (LCAs) are one of many tools NREP uses in collaboration with advisors and contractors. This includes a focus on the total CO2 footprint of building materials, including their production, transportation, construction, and maintenance during the expected lifetime of the building.

“It doesn’t necessarily have to be more expensive to build sustainably. However, it is crucial to get involved early in the design phase and have a dialogue with the contractor about choosing robust materials with the lowest possible CO2 intensity and incorporating renewable energy supply into the building design,” emphasizes Rasmus Grosen Olsen.

At NREP, the intensive work on sustainability and carbon footprint is part of the overall effort for corporate social responsibility or ESG (Environmental, Social, and Governance). For example, when NREP invests in residential construction in Tingbjerg in Denmark, it is done both to earn money and with a social perspective to revitalize the Copenhagen neighborhood, create a diverse, flourishing urban area with a community that will attract citizens who want to be an active and engaged part of the neighborhood.

Sustainable Wave

Sustainability is a central development area in NREP’s strategy and is related to Rasmus Grosen Olsen’s previously mentioned “wave”. It stems from the regular climate reports and international conferences organized by the United Nations - including global agreements to limit CO2 emissions to curb global warming.

The climate agreements have triggered a complete green transition in both the EU and Denmark - with a steady stream of new rules, such as lower energy consumption, insulation of properties, requirements for smaller carbon footprints, and using life cycle analyses in new construction. Last year, the transition or wave gained extra momentum when the conflict in Ukraine led to sharp energy price increases and highlighted the EU’s energy dependence on an authoritarian regime.

Green Loans

Among the newest pan-European initiatives is the so-called taxonomy - with the EU’s preference for complex expressions. Here, banks and investors are required to account for the climate aspects of their loans and investments.

“The major financial companies have established or are establishing sustainability teams with expertise in real estate, and within the next few years, I am convinced that progressive financial products will come to the market, with clear commercial incentives for property investors to invest in sustainability initiatives in each property, as well as to meet the banks’ ESG reporting requirements regarding the EU Taxonomy,” predicts Rasmus Grosen Olsen.

The market reinforces the sustainable wave

He points out that market forces are strengthening the sustainable wave in several ways. “We can see that large companies are adopting ESG reporting standards such as the Science-Based Targets Initiative (SBTi) or have already incorporated SBTi into their ESG strategy. Some even demand DGNB-certified leases, which reduces the vacancy risk and increases the possibility of higher rental income on the properties. Similarly, pension funds and other investors prefer to invest in properties with a transparent ESG profile in the form of, for example, a DGNB certification, as the properties entail less risk – and potentially contain better opportunities to sell at higher prices from the current owner’s point of view,” states Rasmus Grosen Olsen from NREP.

Warning investors

At the same time, he warns investors and others in the real estate sector about the possible consequences of not becoming part of the sustainability wave.

“Just as investors focusing on sustainability optimization of properties potentially may have prospects of less vacancy, higher rental income, and increased property values, investors without focus on sustainability risk ending up with non-transparent “stranded assets,” where the property cannot document its ESG profile or does not comply with the EU taxonomy. The properties may risk hitting a vicious circle, where they may become harder to rent out and meet the demand for rent reductions, thereby getting slightly worse loan terms, resulting in a slightly lower sales price.

Factors triggering more sustainability-optimized properties

• EU requirements for, e.g., energy consumption in existing buildings and CO2 footprint in new construction

• Sharpened requirements from the Danish Parliament regarding CO2 footprint in the construction

• Sharpened EU requirements for sustainability for loans/investments (taxonomy)

• Adjustment to green energy in the EU and Denmark

• More investors demand, for example, DGNB certifications if they are to buy properties

• More companies demand sustainable premises if they are to be tenants

• Properties with a large CO2 footprint can lose value (“stranded assets”)

• Sustainable investments can obtain favorable financing