12 January 2024

How To Avoid Greenwashing Risk In The European Real Estate Sector

As sustainability becomes an integral part of developing and managing property, the possibility of a claim of greenwashing is now an important risk to manage...
European Union Real Estate and Construction
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As sustainability becomes an integral part of developing and managing property, the possibility of a claim of greenwashing is now an important risk to manage

Greenwashing is often thought of as deceptive marketing based on false environmental claims. While deliberately incorrect claims with the purpose of misleading the eco-focused consumer is one extreme of greenwashing, in reality the term encompasses a much wider set of behaviours and actions. The EU's proposed Green Claims Directive refers to greenwashing as "the practice of making unclear or not well-substantiated environmental claims". It is easy for the unwary to inadvertently fall into the greenwashing trap.

Desirability of green features

In recent years, green features and energy-efficient designs have become increasingly sought after by businesses, with a clear and widening two-tier market emerging Europe-wide between desirable prime "green" real estate and less attractive inefficient building stock.

However, it is important to ensure that any claims being made about a building or its operation are meaningful and accurate: over-enthusiastic claims that may mislead have the potential to cause serious damage to a business's reputation.

Clear sustainability goals

Before making any green claims, a real estate business should establish clear and measurable sustainability goals. These goals should be realistic, attainable and reflect a genuine commitment to reducing environmental impact. Whether it is reducing energy consumption, water usage or incorporating renewable energy sources, having well-defined objectives will help to create an honest narrative.

Meaningless labels such as "ESG compliant" are unhelpful. Where there is no fixed meaning to a term used to promote a building's credentials, it is apparent to most that it could simply mean that selected features of the construction or management complies with the developer/landlord's own arbitrary (perhaps weak) standards.

Recognised third-party certification

Obtaining a recognised third-party certification to validate sustainability claims is likely to be the most effective strategy for real estate businesses to attract well-advised purchasers or occupiers to a building. These certifications act as a stamp of approval, offering transparency and credibility for the claims made.

BREEAM is an important and internationally recognised certification standard for the built environment and is used in 70 countries. Its robust methodology includes objective and evidence-based assessments across a range of characteristics.

As BREEAM certification can be obtained in different areas, to avoid claims of greenwashing, it is important to be clear whether the building has achieved the claimed certification grade for its construction, its operation or both.

In addition, businesses should be careful not to fall into the trap of promoting a building as "BREEAM Outstanding" before all stages of the BREEAM assessment have taken place and final sign-off confirmed. Developers should be clear that they are "targeting" a BREEAM Outstanding/Excellent rating and avoid making misleading claims about what their projects have already achieved.

Regulatory obligations and transparent communication

A business should clearly articulate all relevant features of a building, ensuring that the information is readily understood and easily accessible. Vague or generalised statements could be misconstrued as greenwashing so it is best to be specific about the materials used, energy-efficient technologies and management initiatives.

Particular care must be taken with regard to local regulatory frameworks and sensitivities. "Soft law" initiatives, such as regulator-issued policies, are influential in some EU Member States. Although they are not legally binding, they provide useful guidance to avoid claims being perceived as misleading. Some countries, including France, also strictly regulate particular green claims wording (for example, "carbon-neutral" or "zero-emission" claims).

Larger and listed businesses may have regulatory obligations to disclose particular information which will frame their sustainability goals, as well as the data they measure and the form of their reporting.

There is a trend towards strengthening the rules governing the reporting of environmental impact as well as a trend towards ensuring objectivity and genuine impact, for example via the Science-Based Targets initiative (SBTi). As regulators strive to ensure the availability of meaningful and comparable data sets, there is increasing international harmonisation.

In the EU, companies subject to non-financial reporting obligations must report on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under EU Taxonomy Regulation. Technical screening criteria for this assessment of activities (including the construction of new buildings, renovation of existing buildings and the acquisition and ownership of buildings) have already been set by the European Commission and must be followed by businesses.

The Corporate Sustainability Reporting Directive entered into force on 5 January 2023, It mandates new reporting on social and environmental issues for around 11,700 affected EU businesses from 2025. (For more on the directive, see our Insight.)

The United Kingdom is expected to follow suit, aiming to create the UK Sustainability Disclosure Standards by July 2024, which the UK government has stated "would only divert from the global baseline if absolutely necessary".

Being prepared for the increased formalisation and scrutiny of what may previously have been voluntary reporting will be critical for businesses to avoid any sustainability claims being dismissed for inaccuracy or failing to provide the full picture. The existence of these formal standards is likely to increase awareness of how complex accurate reporting on environmental impact is. Even businesses that fall outside the scope of mandatory reporting may find themselves open to additional lines of questioning as awareness of what makes a building and its operation truly "green" becomes more widespread.

Greenlighting and the big picture

Talking up the good and ignoring the not-so-good is easy to do, and may even seem logical. However, it exposes a business to risk of an accusation of "greenlighting": where a business spotlights only the areas in which it scores highly for sustainability. For example, a building may have great recycling processes and facilities to encourage cycling to work, but let itself down with poor climate control management.

With the new Corporate Sustainability Reporting Directive and its UK equivalent on the horizon, many businesses will be required to look beyond the obvious.

The internationally recognised Greenhouse Gas Protocol Corporate Standard assesses carbon footprint by looking at three scopes. Scope 1 covers direct emissions by business-controlled resources, such as use of heating within its buildings. Scope 2 refers to indirect emissions that result from the business's actions, but that are not directly controlled by it (such as purchasing energy from a utilities provider). Finally, there are Scope 3 emissions, assessment of which involves a much wider approach to reviewing a business's overall environmental impact. For a building, it would include the energy use in leased assets, the processes adopted for the construction (including the chosen materials and their methods of transportation), and what happens to the structure when it reaches the end of its life. Scope 3 emissions data is included in the new mandatory reporting standards and information relating to the "whole-business, whole life-cycle" is likely to be increasingly demanded and scrutinised by stakeholders.

To mitigate the risk of greenwashing allegations, those making green claims in relation to buildings must also monitor regulatory changes affecting buildings to avoid talking up sustainability credentials when all the business is doing is complying with legal requirements.

This is particularly relevant for businesses in the EU, with the upcoming revision to the EU Energy Performance of Buildings Directive. This directive will result in many new legal requirements and obligations aimed at achieving a zero-emission building stock by 2050 and businesses will need to review and revise their green claims relating to buildings accordingly.

Osborne Clarke comment

For real estate businesses, incorporating sustainable practices is not only an ethical choice but also a strategic one. Businesses can avoid the pitfalls of greenwashing by prioritising transparency, adherence to recognised standards, and genuine commitment to sustainability.

To put itself in the best possible position, a business needs to understand the nuances of making green claims. It is important to obtain and evaluate meaningful and appropriate data to ensure accurate communication and authenticity – and to avoid anything that could be construed as greenwashing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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