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As ESG (Environmental, Social, and Governance) criteria become central to real estate investments, mastering ESG due diligence has never been more critical. During a recent session hosted by SA���ʴ�ý's ESG Academy, experts from Gleeds, Torsten Hanuschik and Christian Fischer, offered invaluable insights into how ESG due diligence is evolving, particularly for large-scale property transactions.

Shifting Focus Toward ESG

Traditionally, due diligence focused on technical assessments like structural integrity and heating systems. However, as Hanuschik explained, the landscape has changed. Today, ESG factors such as energy efficiency, CO2 neutrality, and sustainability certifications (LEED, DGNB) play a key role in nearly all transactions. “ESG is a crucial part of almost every due diligence process now,” Hanuschik noted, emphasizing that a lack of alignment with ESG principles can even cause deals to fall through.

For instance, energy efficiency and sustainability certifications have become deal-breakers in Europe, while in other regions like Asia, they’re still emerging concerns. Hanuschik highlighted that these factors significantly influence exit strategies, as future buyers will prioritize properties that meet strict sustainability requirements. Ignoring these considerations can lead to increased risks and costs, particularly when looking to sell a property in the next 10 years.

A Tangible ESG Due Diligence Approach

Fischer, who focuses on technical and ESG due diligence at Gleeds, elaborated on the process, offering a practical example of how ESG criteria are integrated into assessments. "We typically begin with a desktop analysis," he explained, reviewing essential documents like energy certificates, building permits, and thermal insulation verifications. This data forms the basis of their initial evaluation, identifying key focus areas such as energy consumption, waste management, and infrastructure accessibility.

Environmental, social, and governance aspects are all part of the equation, but the focus is often on environmental factors—particularly energy efficiency and emissions. ESG due diligence includes looking at building systems to see if energy certificates align with the installed infrastructure. Any discrepancies, such as outdated heating systems or inefficiencies in insulation, are flagged for further investigation during on-site visits.

The use of digital tools, like SA���ʴ�ý’s ESG software, enables consultants to simulate various improvement scenarios. Fischer demonstrated how their software allows them to model solutions such as installing heat pumps or upgrading the building envelope to reduce carbon emissions. Such measures can help real estate owners stay within future CO2 limits while making economically viable upgrades. "Replacing gas heating with a heat pump or adding insulation to the roof are actions that can significantly improve a building’s energy performance," Fischer stated.

Filling Data Gaps and Benchmarking

A recurring challenge in ESG due diligence is incomplete data. Fischer noted that tenant behaviour, especially in fully leased buildings, can make gathering energy data difficult. In these cases, Gleeds often relies on benchmarks and historical data from comparable buildings to make educated estimates. He emphasized the value of tools like SA���ʴ�ý’s benchmarking capabilities, which allow consultants to fill these data gaps effectively and provide a comprehensive picture to clients.

Energy certificates, while valuable, aren’t always accurate, especially in older properties where heating systems may have been updated without corresponding changes to the certificate. Gleeds ensures that on-site inspections validate the findings from desktop analyses, offering clients a full understanding of their building's performance.

The Financial Impact of ESG

Incorporating ESG into due diligence isn’t just about regulatory compliance—it’s also about protecting property values. Hanuschik warned that buildings failing to meet ESG standards, especially in energy efficiency, are likely to face value reductions. "We’ve seen properties discounted in valuations because they don’t meet energy efficiency targets," he explained, noting that achieving CO2 neutrality will significantly increase CAPEX (capital expenditures) in the coming years.

By integrating ESG considerations early in the due diligence process, real estate investors can avoid these financial pitfalls. Fischer mentioned that even simple measures, such as switching to LED lighting or installing water-saving fixtures, can enhance a building’s sustainability rating and provide quick wins for investors. "LED lighting upgrades pay off quickly and are great for both the environment and property value," he added.

The Role of Digital Tools in ESG Reporting

Gleeds relies heavily on digital platforms to streamline their ESG due diligence. Tools like SA���ʴ�ý’s ESG software help consultants track energy consumption, model decarbonization scenarios, and assess the financial feasibility of various sustainability upgrades. The software also generates detailed reports that can be shared with clients, providing clear visualizations of where a property stands in terms of emissions and sustainability goals. Fischer praised the system’s ability to integrate consumption data and benchmarks, which simplifies reporting and enhances accuracy.

In conclusion, Hanuschik and Fischer underscored that ESG is no longer a "nice-to-have" in due diligence—it’s essential. Investors who ignore these factors risk higher costs, diminished property values, and potential regulatory issues down the line. By incorporating ESG principles into every stage of the due diligence process, real estate professionals can protect their investments and align with future sustainability standards.

As the session wrapped up, it was clear that digital solutions and a proactive approach to ESG due diligence are the keys to navigating the evolving real estate landscape.

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