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17 March 2021

What tools for a more sustainable finance?

Clémence Verdickt and Auriane Monti

 

With an increasingly demanding regulatory framework and investors seeking to give meaning to their investments, real estate funds must structure their sustainable development strategies. While the green taxonomy developed by the European Commission - coming into force from 2021 -imposes unprecedented rigor in reporting, labels are tools that can help real estate funds align with ambitious strategies.

The Paris agreements, aimed at tackling global warming, have led the European Union to implement several legislative measures aimed at strengthening this goal.

The action plan provided by the European “Green Deal” sets an ambitious goal for Europe: to become climate neutral by 2050 (meaning that its greenhouse gas emissions will be zero or offset). The European Commission has also investigated on how to redirect investments towards sustainable projects and activities so as not to compromise the goal of carbon neutrality.

However, no common definition or framework for these activities had ever been produced. Thus, in 2018, 2019 and finally June 2020, a classification system was introduced to the public, in order to standardise so-called sustainable activities at European level.

The European taxonomy is a tool for classifying activities that can contribute significantly to one of the six environmental objectives established by the taxonomy. The objective is to guide investors, companies, and decision-makers towards investments considered sustainable and to avoid greenwashing.

These activities have been grouped together by sector and classified according to their NACE code (Statistical classification of economic activities in the European Community). They have been assessed by a group of technical experts (TEG) against the following six environmental objectives:

• Adaptation to climate change,

• Compensation for climate change,

• The sustainable use and protection of marine and aquatic resources,

• The transition to a circular economy,

• Pollution control and prevention,

• Protection and restoration of biodiversity and ecosystems.

For an activity to be aligned with the taxonomy and therefore considered sustainable, it must significantly contribute to one of the six objectives, do no harm to the other five categories, and meet minimum social criteria, particularly in connection with the guidelines for OECD as well as the United Nations Guiding Principles on Business and Human Rights.

The TEG recently published a list of activities that significantly contribute to the adaptation and compensation goals for climate change as well as technical criteria to verify such activities’ compliance with the taxonomy. It is expected that further lists, featuring additional environmental goals, will appear in the future.

Companies with an extra-financial reporting obligation should expect to disclose a percentage of their income and CAPEX, which are aligned with adaptation and climate change compensation targets by the year 2022 over the 2021 fiscal year. The TEG recognises that this schedule presents implementation challenges.

European taxonomy is an evolving tool that is gaining momentum at a European scale, while remaining an object of criticism. At the end of 2020 130 civil organisations, including WWF and the European Forum for Sustainable Investment, condemned the disparities between the scientific report produced by the TEG and the draft delegated act on the adaptation and compensation of climate change. They request, among other things, the review of certain criteria deemed inadequate and thus problematic, such as those concerning bioenergy and hydroelectricity. They also demanded to exclude from the text the two polluting activities of coastal transport and cattle-breeding.

Longevity is closely monitoring these advances and the release of the final delegated act to be able to support real estate companies on this new complex regulatory matter, likely to see future twists and turns.

While the European Commission is working on a European eco-label aligned with taxonomy, the French ISR Label is establishing itself as an effective ESG methodology structuring tool.

 

THE ISR LABEL, a tool to support the transition

 

Since October 23, 2020, real estate funds can obtain the ISR label and join the 500 funds that have been labelled since 2015. This State label helps identifying funds investing in the best performing assets in environmental, social and governance (ESG). The ISR label encourage funds to put in place a methodology, indicators, and an action plan for the management of their portfolio. Through its requirements, it then defines a framework that protects investors from greenwashing practices and ensures efficient and transparent asset management.

Assets’ valuation is framed by a precise grid of indicators taking into account the three components of sustainable investment: environment, social and governance. The label is valid for 3 years, although the assessed fund is subject to an annual compliance check.

The fund must implement monitoring processes on:

• 2 mandatory indicators for the environment component: “Energy and greenhouse gases”

• 1 mandatory indicator for the social component (at the assessed discretion): "Mobility" or "Occupant health / comfort"

• 1 mandatory indicator for the governance component (at the assessed discretion): "Supply chain management"

• 4 optional indicators additional to the choices covering one of the 3 components (Water management, Contribution to local development, Stakeholder relations, etc.)

Real estate investment often emerges as a preferred investment for French savings. A growing number of savers choose to finance sustainable projects with positive social and environmental impacts. Deciding to invest in an ISR-labelled real estate fund guarantees to have a direct impact. The investment can, for instance, contribute to renovation projects aiming to improve energy performance, or with a strong social inclusion ambition.

The labelling process enables the identification of key indicators on which the fund and its stakeholders wish to engage to establish a long-term strategy of continuous improvement. The label offers the possibility of choosing a "best-in-class" approach, seeking to maintain performance above the threshold initially set, but the "best-in-progress" approach is the one that commits to improving asset performance. In all cases, a management and performance monitoring approach is essential to maintain the labelled status. This label thus lays the foundations for a fund that wants to gain transparency and sustainability. In its second version, the criteria grid’s standardisation, and a greater requirement on the share of assets in rehabilitation will be expected.  Longevity Partners can support you throughout the entire ISR labelling process, from monitoring indicators’ definition to the design of the methodology to achieve and compel to such objectives.