What Does It Take to Make ESG a Reality in Real Estate?

In 2024, Environmental, Social, and Governance (ESG) considerations have become central to commercial real estate activities, driven by increasing regulatory pressures. While investors increasingly view ESG as a value-added opportunity rather than a burden, the market continues to grapple with significant challenges, says Radosław Jodko, investment expert at RRJ Group.

Is ESG Making a Real Difference?

Companies across industries are introducing ESG reporting, spurred by investor, tenant, and customer demand for sustainable practices. However, questions remain: Are these sustainability policies truly impactful, and to what extent?

Investors and stakeholders are scrutinizing companies’ operations for adherence to sustainable development principles, yet there is much work ahead to overcome persistent barriers.

Key Challenges in the ESG Landscape

1. Data Scarcity and Costly Analysis Tools

A critical hurdle is the lack of comprehensive ESG data and the high cost of analysis tools.
“Insufficient market data hinders the accurate valuation of risks associated with sustainability transitions,” explains Jodko.

New regulations, such as the Corporate Sustainability Reporting Directive (CSRD), are raising the stakes, requiring companies to adopt more robust reporting practices. Collecting and analyzing the necessary data has become a major challenge for many.

2. Decarbonization and Building Modernization

Retrofitting existing buildings to meet sustainability standards presents another significant obstacle.
“Many companies still lack the strategies or technologies to effectively reduce CO2 emissions,” Jodko points out.

The Buildings Directive adopted by the European Parliament mandates that the worst-performing non-residential buildings must undergo energy efficiency renovations by specific deadlines:
• 16% of such buildings by 2030
• 26% by 2033

By 2050, all buildings are expected to be zero-emission. However, modernizing older properties remains a costly and complex challenge, limiting their market attractiveness and increasing financial risk for owners.

3. Lack of Uniform ESG Reporting Standards

The absence of a unified ESG reporting standard adds to the complexity.
“A consistent market practice for ESG reporting is still lacking. I expect this to start taking shape by 2025,” Jodko predicts.

Without standardization, companies face difficulties in demonstrating compliance, and those failing to implement ESG practices risk restricted access to financing and reduced asset valuations.

The Role of Tenant Expectations

Tenants are increasingly factoring ESG considerations into their choices, particularly in office spaces.
“ESG aspects now play a key role in creating competitive advantages in the property market,” notes Jodko.

Under the CSRD, approximately 50,000 companies in the EU—and 3,500 in Poland—must report on their environmental and community impact, along with management standards. This includes emissions from the buildings they occupy, making landlords’ ESG compliance essential for tenants.

Failure to provide accurate data can lead to severe consequences, including criminal tax liability, equivalent to penalties for unreliable financial reporting.

Looking Ahead to 2025

To make ESG a reality in real estate, the industry must overcome these challenges:
• Develop accessible, cost-effective tools for data collection and analysis
• Establish clear, standardized reporting practices
• Accelerate modernization of older buildings to meet stringent sustainability targets

As tenants, investors, and regulators continue to prioritize ESG, companies that adapt proactively will secure a competitive edge.
“The costs of inaction are significant, driving investors and tenants to favor sustainable options. Meeting ESG expectations is not just a regulatory requirement—it’s a business imperative,” concludes Jodko.

The path to fully integrating ESG is complex, but with collective effort and innovation, the real estate sector can rise to the challenge and lead the transition to a sustainable future.

Author: Radosław Jodko, investment expert at RRJ Group