ESG is here to stay

March 9, 2023

During a reflection session on the findings the 20^th annual edition of the 2023 Emerging Trends in Real Estate Europe report published by PwC and ULI and hosted in Warsaw in the first week of March, invited experts from the development, lending, consulting and legal industries shared their perspectives on the handful of new obligations, challenges, and opportunities ahead.

Faced with this new reality, they already adjust and innovate their ways of business thinking, strategizing, and operating. Especially since the global turn towards a more environmentally and socially sustainable economy is a work in constant progress. The ESG era, commenced nearly 20 years ago, not only will be solidifying over another two decades, but will also be predominantly setting the scene for future growth of real estate market actors in Poland.

Kinga Barchoń, Partner at PwC and Maarten Vermeulen, SVP, National Councils at ULI Europe

Past the point of no return

“In the future, all businesses will need to be run responsibly, and create positive environmental and social impacts, along financial returns,” said Maarten Vermeulen, SVP, National Councils at ULI Europe, while presenting the report’s results and factors that had had the biggest impact on its real estate industry.

“If you take into account that 40% of GHG emissions is generated by existing buildings, which means we have a responsibility to do something about it as an industry,” he added. This stance is echoed also in the opinions of over a thousand of European property professionals surveyed for the report, who find that the climate crisis will become intrinsic to fiduciary duty.

One of the many unique insights of the joint ULI and PwC research is a ranking of changing real estate sectors’ investment prospects, which has swollen from just eight categories in 2004 to as many as 27 in 2023. “Over 20 years, real estate has expanded far beyond the realm of office, retail and industrial into a hugely diverse menu of investable assets. The next two decades will be much more about just how the industry oversees a blurring of the distinctions between the many and varied property types,” reads the report.

The report also looks into some key shifting concerns for the real estate business, now and in the mid-term. “Today it is all about ESG agenda, climate change, changing consumer demands and expectations. Also, interestingly, this year, geopolitics and global migrations made it to the list for the very first time,” Maarten Vermeulen summed up.

Looking ahead

Its authors also list Europe’s top 10 sector prospects, which now are new energy infrastructure, life sciences, data centres, social housing, retirement/assisted living, affordable housing, self storage facilities, logistics facilities, co-living and private rented residential.

“What we are seeing for the second year in a row is that investors keep new energy infrastructure top of mind – with solar panels, wind energy, energy storage – those things are increasingly important and tied to all the new developments around the rise and dominance of ESG,” explained Maarten Vermeulen. Five out of the ten sectors are related to the housing sector. “Given the shortage of houses basically everywhere across Europe as well as their affordability, this will require being creative, looking for alternative solutions,” he added.

Time to walk the walk

ESG agenda’s prioritization, intensification and operationalization will now require more strategic, specialized, and pragmatic approaches from the Polish real estate companies. These are some of the key takeaways from a roundtable discussion with experts, moderated by Kinga Barchon, partner of PwC and Soren Olsen, chair of ULI Poland. The most urgent challenges will range from finding and upskilling employees with new skillsets, to overcoming the reporting, compliance, and regulatory hurdles, to transitioning to new business cultures and models.

According to Tomasz Lubowiecki, founder and president of the board of logistics developer 7R, the market is certainly going through a time of changes, but also a time to act when it comes to ESG. “It is not ‘business as usual’ moment. We talked about the transformation a lot in the past and now it is time to walk the walk. We simply cannot do things the way we did anymore.” Especially when investors are clear and determined about their new, ESG-driven preferences, and their project selection is becoming less a matter of price and more a matter of a project’s eligibility.

Also, in eyes of Włodzimierz Skonieczny, director of commercial real estate finance department at ING Bank Śląski, the market environment is changing fast these days, but ESG is and will be a constant in this world. “Everything accelerates now, really, when it comes to ESG. Two years ago in Poland, ESG debates revolved mostly around bicycle racks and parking spaces or urban bird houses, now they finally touch upon core businesses, financial flows and banks supporting the European green transformation,” he noticed.

“Overall, with some sectoral exceptions, occupiers in Poland are not educated enough yet in ESG because they don’t perceive it yet as its core business, where their focus normally is,” added Krzysztof Misiak. ESG education, together with ESG data gathering and managing, will certainly be demanding but crucial processes to address.

Greener than ever

As banks start to fulfil their new, broader sustainability reporting duties, more and more companies will be getting included in the extended scope of ESG reporting over the next years, which means that more businesses will be getting asked about, and also will be asking about, ESG issues. “When applying for any loan now, banks will need to ask you about your capex’s alignment with the EU taxonomy and your net zero pathway plans,” Włodzimierz Skonieczny added.

As the corporate maturity, awareness and readiness for ESG transitions is growing by the day, project financings powered by green loans or sustainability-linked loans will be on the rise in Poland in the coming years. “The market must understand that in the long-term, with time, ESG loans and transformations will be a much more profitable option,” Krzysztof Misiak, executive partner, head of Poland at Cushman & Wakefield argued. While some commercial real estate sectors will be quicker than others to catch up with the regulatory obligations and market expectations, varied ESG adaptation and learning paces will likely also be evident between landlords and occupiers.

(from the left) Tomasz Lubowiecki, Agnieszka Stankiewicz, Maarten Vermeulen, Włodzimierz Skonieczny, Krzysztof Misiak

A year after

The Russian invasion and war in Ukraine has taken its toll on the European economy, and the Polish real estate market. Whether in surging energy costs, inflation or interest rates, the war’s consequences are easy to spot in any market-related discussions, also when it comes to ESG and energy security agenda. “We had to adapt to serve different needs of our clients, including within ESG matters or restructured finance, NLPs, data centres,” said Agnieszka Stankiewicz, partner at law office Greenberg Traurig Nowakowska-Zimoch Wysokiński. “Our major concern right now is based in uncertainty around valuations or transactions and in ESG legislative challenges.”

According to her, investors are well-aware that the ESG wave is coming, and that Central and Eastern European countries are somewhat behind compared to Western European countries in the matter. “But this will change, and at some point start to even out as the EU countries have the same deadlines to meet. (…) Looking at Germany, which have already adopted some national regulations that reflect and precede the future EU regulations, progressive and proactive approach to ESG pays off,” she concluded.

Thank you to all the speakers and participants! Thank you to PwC for hosting us!