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CSRD: A Boost for ESG in Real Estate

The new EU sustainability directive, Corporate Sustainability Reporting Directive (CSRD), is shaking up the real estate sector significantly: this groundbreaking initiative requires real estate companies to report crucial ESG matters both within and outside their organization, which will have a massive impact in the short term.

Large publicly listed companies must comply from January 1, 2024. Medium-sized companies will follow a year later. A step-by-step plan is always helpful to get started. To meet CSRD requirements, you need to perform a materiality analysis and baseline assessment, set your ESG goals within a long-term ESG strategy, and get your management systems and internal controls in order.

A materiality analysis is a process where real estate companies identify and prioritize key environmental, social, and governance (ESG) issues relevant to their operations and stakeholders. This analysis helps organizations determine which topics have the most significant impact on their business and where to focus their sustainability reporting, strategy, and decision-making.

How does CSRD relate to the widely discussed Sustainable Finance Disclosure Regulation (SFDR) in real estate? In a nutshell, SFDR focuses on the financial sector and deals with how real estate funds incorporate sustainability into their investment decisions and advice. On the other hand, CSRD focuses on real estate companies in general and concerns company reporting on ESG matters. Both initiatives are part of broader European efforts to promote sustainability and ESG transparency.

What will change for the real estate sector?

Due to CSRD, real estate organizations can no longer report solely on their financial situation without mentioning their environmental and social impact. To do this, it's crucial to follow the materiality principle when determining the ESG topics you need to report. Materiality is the concept that determines why and how specific issues are important to a company. By introducing the concept of "double materiality," organizations must consider both the impact of climate-related risks and opportunities on the company's value ("financial materiality" or "internal impact") and the external effects of the company's activities on the environment ("environmental and social materiality" or "external impact").

Besides mandatory requirements, CSRD will also be a massive game-changer for the sector in terms of openness and insight into sustainability risks and opportunities. Additionally, it helps real estate companies with strong ESG performance attract capital. To comply with CSRD, real estate companies must have a long-term sustainability strategy and expand sustainability management to include both internal and external sustainability risks and opportunities. As the real estate market is driven by financing and investments from various investors, gaining insight into sustainability performance, strategy, and sustainability risks and opportunities is increasingly important to attract capital, gain a competitive edge, and achieve your sustainability goals.

The European Commission will adopt sector-specific sustainability reporting standards by June 30, 2024. These reporting standards are particularly crucial for sectors facing high sustainability risks or impact. The information specified by these standards must be proportional to the scale of risks and consequences related to sustainability issues established per sector.

As part of a multi-year process, EFRAG plans to develop sector-specific standards for 41 sectors. EFRAG, or the European Financial Reporting Advisory Group, is an independent advisory organization that advises the European Commission on financial reporting issues. They are currently working on the first set of sector-specific standards, for which EFRAG will publish recommendations in November 2023, aiming for the Commission to legally adopt them by June 2024. The initial focus is on sectors with high sustainability risk or environmental impact, including the real estate sector.

See also:

ING: CSRD: preparing for a deluge of sustainability disclosures

European Commission: Corporate sustainability reporting

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