Everyone is talking about ESG, but what is it exactly and what can we expect in the real estate industry in 2022? Here are the most important points:

What exactly is ESG?

Investors are increasingly thinking more sustainably. In doing so, they are increasingly confronted with the buzzword ESG. The acronym can be broken down into: E - Environment, S - Social and G - Governance. But what exactly does it mean?

ESG stands for various criteria for assessing the sustainability of a company or an economic activity. These criteria are not just abstract, but in part already very concrete and verifiable in a comprehensive set of rules. The players in the real estate sector are also particularly affected by its implications, as they are responsible for almost 40% of CO2 emissions in the EU.

ESG & EU Directives - What are the regulations?

The first major step in ESG regulations is the Sustainable Finance Disclosure Regulation (SFDR). It obliges institutional investors and asset managers to disclose the extent to which they fulfil ESG characteristics or ESG objectives or take sustainable risks into account (ESG reporting).

The second step is the Taxonomy Regulation, which classifies environmentally sustainable activities uniformly across the EU. For this purpose, six environmental objectives were defined in the Taxonomy Regulation. A sustainable activity promotes at least one of these environmental objectives and does not compromise any of the other environmental objectives. The European Commission has issued a delegated act for the technical assessment of when the environmental goals of “climate protection” and “adaptation to climate change” are being promoted. Such an act does not have the character of a law and serves the purpose of shaping and specifying an EU regulation. In the case of the Taxonomy Regulation, specific technical assessment criteria were defined for both environmental objectives.

What is in store for us in 2022?

At an EU level…

The requirements for sustainable activities are to be further sharpened. The technical assessment criteria according to which an environmentally sustainable activity is assessed are to be extended by a further delegated act. This will then also clarify the technical requirements with regard to the other environmental objectives “sustainable use and protection of water and marine resources”, “transition to a circular economy”, “prevention and reduction of pollution” and “protection and restoration of biodiversity and ecosystems”.

…and at a national level

At a national level, the measures are in line with the Coalition Agreement of the new German Government, which is ambitiously entitled: “Dare to make more progress - Alliance for freedom, justice and sustainability”.

It states that "the course should be set for a social-ecological market economy" and that "economic development and ecological responsibility should be thought together".

The first approaches have already been defined, and they are aimed in particular at reducing CO2 emissions: for example, a funding programme for new residential construction is to be introduced this year, following the expiry of new construction funding for the KfW Efficiency House Standard 55. In future, the focus is to be based on the value of “greenhouse gas emissions per m² of living space” - a major shift from the previous position.
From 1 June 2022, the CO2 tax in addition to the heating costs is to be divided between landlord and tenant. Until now, this has been borne by the tenant alone. The shares will be calculated according to a graduated model on the basis of the building energy class and, in case of doubt, divided in half.

In future, the revenue from the CO2 tax will compensate for the abolition of the EEG levy. This ends on 31 December 2022 in order to relieve the burden on electricity prices.

In addition, an investment premium for climate protection and digital assets is to be created through which taxpayers can deduct part of the acquisition and production costs of fixed assets acquired or produced in the respective year (2022 or 2023) from their taxable profit (super depreciation).

In the future, further adjustments are planned, especially to the Building Energy Act (GEG): For example, an increase in the standards for new buildings to the KfW Efficiency House Standard 40 is planned. From 2024, the parts to be replaced in the case of major extensions, conversions and extensions must also comply with the KfW Efficiency House Standard 70, and from 1 January 2025, it is to be possible for every newly installed heating system to be operated on the basis of 65% renewable energies.

ESG – where will it end?

The measures are far-reaching and a market-based rethink is desired by all sides: by far the largest number of market participants want to fulfil their social responsibility by meeting sustainability criteria and investors are increasingly demanding a commitment to ESG - and not infrequently carry out special ESG due diligence.

The ESG factors “social” and “corporate governance”, on the other hand, have received almost no legislative input. There is therefore a need for additional action here. This is almost inevitably accompanied by great legal uncertainty, because it is completely unclear which requirements will apply in the future and whether the property recently acquired with an ESG seal will still be allowed to bear this seal in five years’ time.
It is therefore still advisable to examine each individual case thoroughly.

Authors: Julia Averbukh und Christian Werthmüller