The path towards ESG-compliant real estate in Switzerland : outlook for a comprehensive ESG rating for real estate
Creators: name: Archer-Svoboda, Laura
Publisher: name: ZHAW Zürcher Hochschule für Angewandte Wissenschaften
Year: 2022
Subjects: 332: Finanzwirtschaft

description: The Paris Agreement and the United Nation’s Sustainable Development Goals (SDGs) has led to raised awareness and increased sensitivity towards greenhouse gas emissions reductions and development in areas involving environmental, social and governance (ESG) aspects. Switzerland has set a commitment to reduce carbon emissions by 50 per cent of the 1990 levels by 2030 with an indicative target to reduce net carbon emissions to zero by 2050.
A large percentage of Switzerland’s CO2 emissions is a result of high emissions stemming from the real estate sector. Approximately one quarter of the 32 metric tons of total greenhouse gas emissions produced on an annual basis in Switzerland is contributed by buildings. The real estate sector in Switzerland will need to play a major role in the coming years in reducing emissions through replacement of fossil fuel heating systems and retrofitting measures to improve the energetic efficiency of buildings. However, various issues are being faced in the real estate sector in Switzerland which challenge the feasibility of achieving the targets of these frameworks.
The research for this thesis will contribute to a project collaboration between ZHAW and the Swiss company ‘Conser’ in the development of an ESG-rating for real estate in Switzerland. The aim of this paper is to outline the most critical issues being faced in sustainable real estate in Switzerland, to provide initial research into ESG indicators that could be incorporated into an ESG real estate rating, and to determine relevant information that could be abstracted from annual reports for use in the development of an ESG rating for real estate funds.
Qualitative research of the real estate market consisting of desk research and interviews with industry experts was conducted to identify the most urgent issues facing the real estate sector in Switzerland in their efforts towards sustainability. Apart from the high carbon emissions output in the real estate sector, major issues include insufficient and scarce resources available to reach the emissions reduction targets of the Paris Agreement, a lack of knowledge within the real estate industry and on a governmental level in understanding the urgency to reduce CO2 emissions, the shortage of industry experts to measure and monitor emissions and to plan for circular economy, and the lack of consideration for biodiversity, circular economy and grey energy.
Additionally, transparency issues were identified due to the large offerings of real estate ratings, frameworks, and certifications on the real estate market. Various  methodologies and calculation methods utilized makes comparability for real estate investors difficult, and many of the tools are static in nature, lack visibility, transparency, and forward-looking strategies with concrete emissions reductions measures, and can be time-consuming and costly.
Moving forward, the mobilization of public and political authorities will be required to address current problematics such as tax laws, the need for additional subsidy funding to increase investment in fossil-free heating sources, clear specifications regarding calculation methods and the level of assumption-making allowed in reporting, material passports for buildings to account for circular economy, as well as the lack of conformity with the EU-taxonomy and standards regarding sustainability reporting, and the importance of driving solutions that account for grey energy, biodiversity, and social aspects.
The impact of ESG on the real estate industry goes beyond the reduction of carbon emissions and should be considered in a real estate ESG rating tool apart from typical carbon indicators. The inclusion of social factors in real estate can make a building more attractive, reduce vacancy rates and ultimately increase long-term returns. However, social factors are not common practice and are often neglected by asset owners and fund managers. An assessment to identify ESG indicators that could be integrated into an ESG rating for real estate was carried out and it was determined that various ESG indicators involving social housing, accessibility, mobility, health, crime rates, air quality, and infrastructure using public information sources such as governmental data banks and geospatial data would be useful. Through the provision of data from real estate owners, further indicators related to affordability, diversity, tenant well-being, communication, technology, building air quality, water intensity, and biodiversity could be incorporated.
In a final step, various real estate funds were compared to get an indication of available information that can be utilized to develop an ESG real estate rating for indirect real estate. The results showed that the data published in annual and sustainability reports is to a large degree heterogenous. Although data such as location of the real estate entities, CO2 emissions and total energy consumption are provided by most funds, many sustainability-related data points are not disclosed by most of the funds, making future analysis difficult. The results of the fund comparison indicate that further data sources will be essential in determining ESG indicator proxies for indirect funds, and that pattern recognition modelling of data sets and the use of geospatial data to determine building characteristics should be explored in detail.