More and more real estate funds are reporting on environmental, social and governance (ESG) factors in their annual reports, because investors consider the non-financial performance of these funds to be important. To map this development, BDO has analysed the ESG reporting by listed real estate companies in their FY2022 annual reports.
The analysis shows that the funds that stand out positively are transparent about the ESG standards they apply, open about their data collection processes, obtain limited assurance from an auditor about their reporting and make their funding sustainable through green bonds.
Focus still on the climate theme
In today’s rapidly changing world, ESG reporting has become an essential part of corporate transparency and responsible business practice. Sustainability reporting will become even more significant due to the approaching Corporate Sustainability Reporting Directive (CSRD). Our analysis provides valuable insights on the most prominent themes mentioned in ESG reports, on which reporting under the CSRD will be mandatory. Climate change, an urgent global concern, is generally the central theme in these reports. Companies emphasise their commitment to climate change adaptation, mitigation strategies and energy saving. At the same time, real estate companies also prioritise their own staff, recognising that their employees’ well-being is crucial for sustainable success. They cover important aspects such as working conditions, ensuring safe and supportive workplaces, and promoting equal treatment and opportunities for all employees.
Use of ESG standards improves the quality of annual reports
One of the key areas considered in our analysis is how companies report on ESG norms and standards. Commonly used frameworks and standards include the Global Reporting Initiative (GRI), EPRA Sustainability Standards, Task Force on Climate-related Financial Disclosures (TCFD) and the United Nations Sustainable Development Goals (SDGs). These involve many different sustainability standards. One disadvantage of this is that it can lead to confusion and makes comparability difficult. Moreover, it is crucial that real estate funds not only commit to these standards and frameworks, but also apply them consistently in their reporting and across reporting years.
One of the best practices we have noticed, with CSRD in mind, is therefore not only to include all disclosures relating to a particular standard in a separate table or appendix, but to integrate the relevant sustainability information in the annual report. This will make the report more readable, comparable, and relevant. Such integration will also correspond to the structure of the CSRD standards.
Adhere to the structure of the CSRD standards
Embedding ESG strategy and governance into the company’s overall strategy is crucial, and this can be achieved by establishing or appointing a dedicated ESG committee. Funds that have implemented such measures have typically allocated resources or hired expertise to formulate an ESG policy, set up data collection processes and disclose how this data is created and controlled. They then describe them in detail in their annual reports. Our analysis shows that this has a positive impact on how they disclose ESG information. It reinforces sustainability integration and gives sufficient attention to the most material themes. This approach to reporting also corresponds to the structure of the draft CSRD standards: governance, strategy, management of impacts, risks and opportunities, and targets and metrics.
A good foundation as a starting point for the CSRD requirements
While achieving limited assurance constitutes a final step in the ESG reporting process, this does not mean that the funds fully comply with the CSRD requirements. Even though many real estate funds have established KPIs and obtained limited assurance on their ESG reports, this is not necessarily sufficient for CSRD compliance. The CSRD also calls for an explanation of the entity’s strategy on ESG themes, the governance structure in its organisation and how companies manage their material impacts, risks, and opportunities. This also requires an understanding of plans and progress over the short and long term.
Major impact of CSRD reporting requirements for listed real estate companies
Reporting on sustainability is becoming increasingly important for listed real estate companies. It is essential that companies report based on uniform and comparable ESG standards and frameworks, explain their data-gathering processes, and obtain limited assurance. Based on our analysis, we see mature ESG reports at this segment of companies.
But we also still see much variation in the use of standards, commitments, and targets. Reporting can be more detailed and more structured. The CSRD reporting requirements may make a difference here, as the draft European Reporting Standards (ESRS) are going to require uniform detailed disclosures, and assurance will be mandatory.
Points of attention
An initial point of attention is that the CSRD will have a significant impact, even though most real estate funds already have experience with ESG reporting and assurance. An analysis of, for example, the EPRA Sustainability Standards and ESRS would be useful in determining this impact. Start an assessment of the impact of CSRD in time. Prepare a requirements analysis and a roadmap to be ready for CSRD reporting by 2025.
A second item of attention relating to the advent of the CSRD standards involves obtaining data on property from the value chain. Information on all properties on energy or waste data, for instance properties that are not self-managed, is not currently available. A fund can already start increasing this data availability and quality by making agreements, deploying tooling, and mapping the impact of value chain information.
