Decarbonization is a megatrend
In light of the Covid-19 pandemic, it would seem as if the long-term impacts of climate change have been pushed into the background. However, global warming presents us with the greatest challenge mankind has ever faced. In point of fact, the economic consequences of climate change exceed the global coronavirus shock many times over. And so far, the costs of activities that take a toll on the environment have not been sufficiently factored in – with the result that the impacts and risks of climate change and climate policy have not been fully priced into the pries of financial assets. Now, however, this seems to be changing. Institutions such as the European Central Bank, Germany’s financial supervisory authority BaFin and the Bundesbank are making great efforts to integrate climate risk into their assessments. Since the start of 2021, the ECB has started to accept “green bonds”, i.e. those bonds whose interest coupons are linked to sustainability targets, as collateral. These can also be bought as part of the ECB’s bind buying programme as long as they satisfy the scheme’s other eligibility criteria. Given such developments, one thing is clear: decarbonization will continue to reshape the real estate sector for many years to come.
Real estate is the problem child
To achieve decarbonization goals, investors apply a range of strategies, including the Manage to Green principle – which is based on several cornerstones:
- Setting sustainability thresholds for investments
- Factoring in the necessary investment to achieve target values
- Formulating specific CO2 savings targets
- Defining climate pathways until 2050
Since about three quarters of all properties still rely on the two most emission-intensive heating sources, gas and oil for heating, and supplying heat energy accounts for more than three quarters of all CO2 emissions, this is the area that offers the greatest potential for carbon savings. Due to the trend towards using lower-emission heating sources in new buildings and renovations, it can be assumed that this will significantly reduce emissions in the medium term.
Moreover, supplementary energy, i.e. electricity and district heating, also accounts for a significant share of CO2 emissions from buildings. If these are reduced as a result of the energy transition, the real estate industry will, as a result, become significantly more environmentally friendly.
Social Impact investing and the metamorphosis of the sustainability evolution
While everyone seems to be focusing on the environmental dimension of real estate investments, it is important not to lose sight of the social aspect within ESG, in particular the real estate industry’s impact on society as a whole. Given the low interest rate environment, the social issues associated with the real estate industry have in any case benefited from the fact that investments in established asset classes have increased – and returns have decreased. As a result, alternative asset classes have risen up the agenda, including investment opportunities in social infrastructure. Nursing care funds in particular have become an increasingly attractive investment thanks to the convergence of several factors: On the one hand, most municipalities have a shortage of suitable care facilities. On the other, care homes provide a relatively secure cash flow and offer stable, long-term returns given the Germany’s growing population of seniors.
Professor Thomas Beyerle
Given the real estate industry’s rather hesitant approach to social issues to date, there is massive potential to apply Social Impact criteria and further expand the scope and scale of ESG investments. What’s more, there are strong indications that the impact of the ongoing coronavirus pandemic on our society will create additional demand – and thus new investment opportunities within this asset class.