The provision, use and demand of sustainability information, in particular within the investment community, has been increasing significantly and rapidly over the past few years. The Non-Financial Reporting Directive (Directive 2014/95/EU, the ‘NFRD’) contributed to this development when requiring companies under its scope to report for the first time in 2018 (for the financial year 2017).
Another significant development has been brought with the Final Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which represents the very first market attempt to integrate sustainability into financial reporting. It is a strong signal that greater efforts are required to tackle climate change and the need for improved transparency in the sustainability performance of the companies. More urgently, there is a need to address the reporting of their financial exposure to climate risks and the associated implications for their business.
Buildings are responsible for around 40% of energy consumption in Europe, and there is a significant annual investment gap estimated at around EUR 177 billion between 2021 and 2030 (totalling EUR 1.77 trillion), out of which the biggest gap relates to investment in energy efficiency in buildings (74%). In this context, the Commission’s commitment to promoting greater transparency on ESG-related risks and performance is greatly welcomed by EPRA, which with a membership comprising of 245 property companies and investors has long envisaged the same and supported public disclosure of environmental, social and governance (ESG) data as a fundamental component of a sustainable approach to real estate.
The new Corporate Sustainability Reporting Directive proposal in a nutshell
In April 2021, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) as part of the review of the Non-Financial Reporting Directive (NFRD). The proposed legislation has a significant potential to substantially change the way the listed real estate sector discloses sustainability information. EPRA and its Sustainability Committee have been very active on this dossier. Below we discuss some of the changes the CSRD introduces in its proposal.
The Commission agreed with EPRA on a gradual approach regarding the scope
The Commission proposed a gradual expansion of the scope, starting with all large companies from 2024 (for the financial year 2023) and moving to all remaining companies listed on EU regulated markets (except listed micro-companies) from 2026 (for the financial year 2025). EPRA welcomes this gradual approach as it enables all listed SMEs to first get acquainted with both the CSRD rules and the upcoming EU sustainability reporting standard, which is expected to be completed by the end of 2023.
We are very pleased to see that the business and investment community in the listed real estate sector and policymakers share the same objective. Both want to bring more companies on the same journey and help them provide financially material ESG information while improving the quality of disclosure. They do it because there is no doubt about the value it brings for sustainable real estate business, and they care about that business.
There are, however, two distinct approaches to accomplish that goal. The first one is faster in the short term but perhaps not as effective in the long term. It would imply a legislative change and extend the scope of the NFRD imposing such requirement also on those companies which might not have any experience in public ESG disclosure. EPRA shared its concerns about this approach. If taken too far, it would risk pushing companies to disclose artificial, immaterial and irrelevant information purely because they have been required to disclose it. We argued that this process should be gradual and go hand in hand with the improvement of the quality of such disclosure.
We then explicitly proposed the following approach, based on the experience of 90 listed property companies representing EUR 209 billion in market capitalisation, 6,000 assets of 174 million m2, of which the vast majority voluntarily and publicly disclose sustainability information. They do so because they are being equipped with the appropriate standard (i.e., the EPRA Sustainability Best Practices Recommendations (sBPR)), assisted by our sustainability team and encouraged by the investment community. They do so not because they are mandatorily required but because it is important for their business, and that is exactly what the investment community needs. It needs to be able to recognise which businesses are committed if given the right tools and which ones are not.
Standard: Sectorial focus important to ensure materiality and increase data comparability
Considering the above, it is important to stress that as from 2026 at the latest, all listed property companies in the EU will fall under the scope of the CSRD and will therefore be required to report their ESG information against the upcoming EU sustainability standard. To our great appreciation, the Commission proposed to include a sector-specific layer to the standard, which will be an important trigger for greater comparability of the ESG data disclosed by all large and all listed companies.
At the moment, most of the EPRA members would not meet the minimum 500 employees threshold for the NFRD rules to apply, yet they would disclose their sustainability information on a voluntary basis to demonstrate how they are managing ESG impacts and remain competitive on the market. Equally, a correlation between the size of listed property companies and the quality of sustainability disclosures has been decreasing over the past years. It shows the high importance and relevance for smaller companies to have access to specifically tailored industry standards.
As we repeatedly stressed to EU policymakers, it is EPRA’s strong view that a successful European sustainability standard needs to have a sectorial focus to ensure that sustainability information is material, relevant and comparable among peers operating in the same industry. Consequently, we were very pleased to see that the Commission decided to include sector-specific information in the EU standard. EPRA plans to conduct an intense outreach to both EFRAG and the Commission to continue with the education on the existing standard for listed real estate, i.e. sBPR, which is greatly recognised by the investment community.
Alignment with the EU Taxonomy
The Commission requested in the proposed CSRD that the EU standard specifies the information companies are to disclose about the EU Taxonomy environmental factors a) climate change mitigation, b) climate change adaptation, b) water and marine resources, c) resource use and circular economy, d) pollution and 6) biodiversity. As EPRA communicated to the Commission, the EU Taxonomy has a great potential in driving sustainability investments in the right direction. Therefore, a greater alignment between the CSRD and the EU Taxonomy should be encouraged.
On the other hand, it is also EPRA’s experience that the listed real estate sector is not yet sufficiently known and understood by neither EU policymakers nor technical advisors on the EU Taxonomy. For example, the Climate Taxonomy Regulation anticipates that the construction of new buildings is exclusively conducted by developers (7.1. economic activity – in ANNEX I). However, property development and property investment have specific differences, and those nuances should be reflected in the EU legislation. At the moment, the construction of new buildings for own portfolio seems not recognised by the EU Taxonomy, which refers exclusively to new developments intended for sale.
EPRA’s role in the upcoming CSRD, the EU sustainability standard, the EU Taxonomy and beyond, will be to educate about the listed real estate sector, its specificities in comparison with other actors in the commercial real estate and construction sectors. We are therefore launching a dedicated educational project as part of wider public affairs efforts to ensure that EU policymakers and legislators understand well the sector they impact heavily by their regulations.
Next steps on CSRD and the EU standard
This proposal from the Commission will follow the ordinary legislative procedure before it can become binding EU law. This will involve negotiations between the European Parliament and Council via a trialogue procedure, likely to result in changes to the proposal published in April 2022. The average length of the ordinary legislative procedure is around 18 months.
In parallel, EFRAG will start working on an initial draft EU Sustainability standard. It will be then considered by the Commission around the time of a political agreement on CSRD between the Parliament and the Council. It means that if the negotiations are completed in the first half of 2022, then the standard could be adopted by the end of 2022, and all large companies would then apply the new rules for the first time in 2024, covering the financial year 2023.