On 30 January 2020, we organized the 11th US Real Estate Forum in Frankfurt, together with ULI Germany. One topic was "ESG Integration within commercial real estate", which Jan von Mallinckrodt from Union Investment dealt with in his presentation.

The subsequent lively discussion among the participants confirmed the great interest of the real estate industry in this complex. A survey of institutional real estate investors conducted by Fonds Forum showed similar results. According to this survey, 52% are already considering the topic comprehensively in corporate and product development. Seventy-eight percent of those surveyed are convinced that there is no way around ESG. That proves it: Economic, ecological and social sustainability are becoming core issues in the real estate industry.

What does "ESG" mean?

The abbreviation "ESG" has become established as a term for sustainable investments. It stands for three sustainability-related areas of responsibility of companies: environmental, social and governance, i.e., environmental, social and corporate governance. The "environmental" factor includes, for example, environmental pollution or hazards, while the "social" factor includes working conditions, health, safety and human rights. "Governance" includes the independence of management and supervisory bodies, shareholder rights, etc.

The legal framework

National regulations

ESG-relevant regulations have existed in German law for a long time, such as those for the protection of the environment (e.g., Federal Immission Control Act) (environmental), for the protection of employees (e.g., Occupational Safety Act) (social) and for proper corporate governance (e.g., Stock Corporation Act, German Commercial Code, administrative instructions of the Federal Financial Supervisory Authority such as the minimum requirements for risk management, minimum requirements for the compliance function) (governance).

However, these standards do not focus on the sustainability of corporate activity as a whole, nor do they allow companies to be assessed and compared on the basis of ESG factors. However, they do contain rules which basically provide for concrete duties of conduct and significant consequences for violations. Anyone who, for example, as the operator of a corresponding plant, causes unauthorised air pollution, must expect the plant to be shut down in accordance with § 20 BImschG. An employer who permanently and illegally orders overtime can, in the worst case, be punished with imprisonment of up to one year, according to § 26 ArbSchG.

EU Regulation

In March 2018, in response to the political and economic challenges posed by climate change, the EU adopted a Sustainable Finance Action Plan ("Action Plan"), which aims to contribute to sustainable finance by channelling capital flows towards environmental and social investments. The plan follows the Paris Climate Change Convention 2016 and the United Nations' Agenda 2030 for Sustainable Development. The Commission published the first comprehensive legislative proposals to implement the Action Plan in May 2018.

The Action Plan consists of a set of regulatory measures that impose obligations on financial market actors, such as capital management companies, insurance companies, pension funds or banks. These include managers of alternative investment funds under the AIFM Directive, i.e., all investment funds other than securities funds, including open-ended or closed-ended investment funds investing in tangible assets such as real estate, infrastructure or companies. The most important measures are the creation of uniform market standards and disclosure and reporting obligations.

TAXONOMY ORDINANCE: The classification of activities and assets as sustainable is currently characterised by a high degree of fragmentation. The so-called Taxonomy Regulation aims to eliminate this situation by creating an EU-wide uniform classification system ("taxonomy") for sustainable economic activities. The increased transparency should make it easier for investors to select environmentally friendly investments. The regulation defines criteria for determining when an economic activity is ecologically sustainable. An investment is considered essentially sustainable (so-called sustainable investment) if it promotes one or more of seven environmental objectives and does not significantly contradict any of the seven objectives:

  • Climate protection,
  • Adaptation to climate change,
  • Sustainable use and protection of water and marine resources,
  • Transition to a circular economy,
  • Waste prevention and recycling,
  • Prevention and reduction of pollution, and
  • Protection of healthy ecosystems.

Technical evaluation criteria for determining what constitutes a significant contribution to an environmental objective and what constitutes a significant impairment of other objectives should be defined by the Commission in delegated acts. The scheme is technology neutral, only solid fossil fuels, such as coal, cannot be declared sustainable. However, gas and nuclear energy are not explicitly excluded from the regulation. In addition, minimum social conditions must be observed.

All financial market participants who do not describe their financial products as sustainable or "green" investments are in principle subject to the obligations of the Taxonomy Ordinance. They must inform their customers in advance whether and to what extent they include sustainability risks in investment decisions and, if applicable, regularly inform them about the sustainability impact of the product even after the contract has been concluded. From 2022, the transparency obligations for financial market participants are to apply.

DISCLOSURE REGULATION: The Taxonomy Regulation is supplemented by the Disclosure Regulation (Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosure requirements for the financial services sector), which entered into force on 29 December 2019. The regulation regulates how financial market participants must inform about sustainable investments and sustainability risks in the future and which information they must make available to the public. It includes publication obligations on the website of financial market participants and rules on what must be included in pre-contractual information. Furthermore, information is to be provided on the compatibility of their remuneration policy with the inclusion of sustainability risks.

BENCHMARK REGULATION: This is supplemented by the so-called Benchmark Regulation (Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 20176/1011 as regards EU reference values for climate-related change, EU reference values in line with the Paris Convention and sustainable disclosure of reference values), which entered into force on 10 December 2019. The new reference value category includes a low carbon investment benchmark based on a standard reference value for decarbonisation and a carbon-favourable reference value that makes it possible and transparent to align an investment portfolio with climate change objectives. One intention is to prevent "greenwashing", i.e., deceiving investors by making misleading or unfounded statements about the environmental impact of the benchmark. The Regulation establishes uniform rules on how financial market participants must inform investors about the consideration of ESG risks and opportunities. The Regulation also requires that negative ESG impacts of investments that lead, for example, to the destruction of biodiversity, must be disclosed.

EU ECOLABEL: Finally, the package of measures will include the introduction of an EU ecolabel for financial products. This certification approach, which has long been in place for everyday consumer goods, is to be applied to certain investment and insurance products in future. This refers to certificates, unit-linked insurance and real estate AIF sold to private customers. In this context, numerous questions still need to be clarified.

The Practice

The issue of ESG has long since reached the real estate industry, as the real estate sector is considered one of the key factors in climate protection. Together with the construction industry, real estate accounts for around 40% of carbon dioxide emissions worldwide. In Germany, buildings are responsible for around one-third of CO2 emissions. ESG criteria have an impact, above all, in the following areas:

Investment decisions and ongoing asset management

ESG aspects are taken into the account over the entire investment life cycle. To this end, due diligence checks are carried out at the time of acquisition with a special focus on sustainability. The certification of the sustainability of buildings is of particular importance. If a property meets international standards, it is much more likely that it will not lose value – which pays off when it is sold. During the holding period, properties are regularly evaluated and optimised according to ESG criteria, with the focus on increasing energy efficiency through energy controlling and operational optimisation. Investments in energy-efficient building refurbishment are regarded as among the most effective means of increasing energy efficiency and thus reducing CO2 consumption. In this way, building owners can reduce maintenance costs and offer their tenants more efficient space.


Tenants are an important driver of green buildings as more and more organisations have a corporate policy that influences their choice of premises. Modern and efficient buildings attract the best tenants, who in turn provide more secure rental income. Important plus points are the health and well-being of the employees, which are achieved through technical building equipment, public transport connections, and amenities, such as charging stations for electric cars and parking facilities for employees' bicycles, fitness rooms, etc.

In addition, landlords have begun to offer tenants "green", also sustainability-oriented, rental contracts. Although there is no uniform standard for such rental contracts, "green" rental contract clauses can be divided into two categories. On the one hand, I am talking about regulations that are linked to the substance and equipment of the property. On the other hand, they are regulations that focus on the sustainable, resource-saving and ecological use and management of the property. The ZIA Zentraler Immobilien Ausschuss e.V. has written a publication with recommendations for regulations. The consideration of ESG may also have an impact on the selection of tenants, e.g., where investors do not wish to be associated with certain activities or sectors for environmental or social reasons.


ESG will play an even greater role in the real estate industry in the future in view of the comprehensive set of EU regulations described above. The decisive factor will be whether social and environmental benefits can be reconciled with the return expectations of investors. It is increasingly assumed that this can even lead to higher investment performance, because future challenges are already being taken into account. In any case, it is time for all market participants in the real estate industry to take a closer look at the issue of ESG and take it into account in their strategy, organisation and decisions.

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